Reputational Risk and Corporate Tax Planning

Abstract

Corporate tax behavior has recently received considerable public interest, and anecdotal evidence suggests that firms are increasingly concerned about the reputational risk of tax planning. Using RepRisk data to capture firms’ reputational risk due to public scrutiny, this study examines the relationship between reputational risk and corporate tax planning. If managers anticipate higher costs of tax planning in response to higher reputational risk, firms might adjust their tax behavior. My results suggest that firms initially react to more public scrutiny and report higher GAAP effective tax rates. However, this association reverses once public scrutiny decays, suggesting that firms make rather superficial changes of their tax behavior in response to public pressure.

Keywords: Reputational risk, Tax planning, Reputational cost

JEL Classification: H20, H25, H26, M41