Preliminary. Please do not quote. AbstractHow prevalent is long-run corporate tax avoidance? Surprisingly, there appears to be no published academic work addressing this basic question. We define tax avoidance based on the ability to sustain a cash effective tax rate (the ratio of cash taxes paid to pretax income) below the statutory tax rate. It is important to note that avoiding taxes does not imply that a firm has done anything improper. There are numerous provisions in the tax code that allow or encourage firms to reduce their taxes. We investigate the extent to which firms are able to engage in corporate tax avoidance over periods as long as ten years. We find that 437 firms, comprising 22 percent of our sample, were able to sustain a cash effective tax rate of less than 20 percent over a ten year period. An initial examination of the characteristics of successful long-run tax avoiders shows that they are spread across industries but cluster somewhat in certain industries such as oil and gas extraction, insurance, and real estate. Other characteristics associated with long-run tax avoidance include having large firm size, being incorporated in a tax haven, having high ratios of property, plant and equipment to assets, being intangible intensive, and being highly levered.

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This study investigates if the use of a Big 6 auditor is increasing in the firm's endogenous propensity to generate accruals. High-accrual firms have greater scope for aggressive and/or opportunistic earnings management and therefore have an incentive to hire a Big 6 auditor to provide assurance that reported earnings are credible. For a large sample of NASDAQ firms over the period 1975–1994 we find that the likelihood of using a Big 6 auditor is increasing in firms' endogenous propensity for accruals. Even though Big-6-audited firms have higher levels of total accruals, we also find they have lower amounts of estimated discretionary accruals. This finding is consistent with Big 6 auditors constraining aggressive and potentially opportunistic reporting of accruals.

This study investigates whether individual top executives have incremental effects on their firms’ tax avoidance that cannot be explained by characteristics of the firm. To identify executive effects on firms’ effective tax rates, we construct a data set that tracks the movement of 908 executives across firms over time. Results indicate that individual executives play a significant role in determining the level of tax avoidance that firms undertake. The economic magnitude of the executive effects on tax avoidance is large. Moving between the top and bottom quartiles of executives results in approximately an 11 percent swing in GAAP effective tax rates; thus, executive effects appear to be an important determinant in firms’ tax avoidance.

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