Financial Statement Comparability and Corporate Tax Strategy

46 Pages Posted: 5 May 2021

See all articles by Hyun A. Hong

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Ji Woo Ryou

West Virginia University

Anup Srivastava

University of Calgary - Haskayne School of Business

Date Written: April 26, 2021

Abstract

We investigate whether a firm’s financial statement comparability is associated with the firm’s tax strategy. We hypothesize that external observers (e.g., press, shareholders, analysts, and tax authorities) can better detect a firm’s atypical tax strategy when the firm has high financial statement comparability with its industry peers. Detection and its consequent penalties should restrain firm managers from choosing tax strategies that deviate significantly from those of industry peers. Using firms’ uncertain tax benefits (UTBs) as a proxy for tax avoidance, we find that the UTBs of firms with high financial statement comparability move toward their industry peers in subsequent periods. Results suggest that comparability reduces tax aggressiveness for high tax-avoidance firms and enhances tax aggressiveness for low tax-avoidance firms, in comparison with those of industry peers. Overall, these findings indicate a strong within-industry harmonization in tax avoidance for firms with high financial statement comparability.

Keywords: Financial statement comparability, Tax distance, Tax aggressiveness, Undersheltering, IRS detection, Manager’s incentives

JEL Classification: H26, M41, M48

Suggested Citation

Hong, Hyun A. and Ryou, Ji Woo and Srivastava, Anup, Financial Statement Comparability and Corporate Tax Strategy (April 26, 2021). Available at SSRN: https://ssrn.com/abstract=3838276 or http://dx.doi.org/10.2139/ssrn.3838276

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Ji Woo Ryou

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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