Corporate tax avoidance and stock price crash risk: Firm-level analysis

Jeong Bon Kim, Yinghua Li, Liandong Zhang

Research output: Contribution to journalArticle

399 Scopus citations

Abstract

Using a large sample of U.S. firms for the period 1995-2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.

Original languageEnglish (US)
Pages (from-to)639-662
Number of pages24
JournalJournal of Financial Economics
Volume100
Issue number3
DOIs
StatePublished - Jun 2011
Externally publishedYes

Keywords

  • Agency theory
  • Crash risk
  • Extreme outcome
  • Governance
  • Tax avoidance

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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