While prior studies have examined how investors perceive extreme forms of tax avoidance behavior such as tax sheltering and uncertain tax position (e.g., Hanlon and Slemrod 2009;Wilson 2009;Koester 2011;Hutchens and Rego 2012), there is little evidence on how investors perceive less extreme forms of tax avoidance. This study fills this void by examining the relation between firm's cost of equity and corporate tax avoidance using three measures that capture less extreme forms of corporate tax avoidance: book-tax differences, permanent book-tax differences, and long-run cash effective tax rates. We find that less aggressive forms of corporate tax avoidance significantly reduces a firm's cost of equity. Further analyses reveal that this effect is stronger for (i) firms with better outside monitoring, (ii) firms that likely realize higher marginal benefits from tax savings, and (iii) firms with better information quality. Our study presents large-sample results on how investors perceive less aggressive corporate tax avoidance and shows that tax planning is a value-enhancing activity for shareholders. Choudhary, P., Koester, A., Shevlin, T., 2012. Assessing tax accrual quality. Working Paper, Georgetown University. Claus, J., Thomas, J., 2001. Equity premia as low as three percent? Evidence from analysts' earnings forecasts for domestic and international stock markets. The Journal of Finance 56 (5), 1629-1666. Dechow, P.M., Dichev, I.D., 2002. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77, 35-59. Denis, D.J., Sibilkov, V., 2010. Financial constraints, investment, and the value of cash holdings. Review of Financial Studies 23 (1), 247-269. Desai, M., 2004. The degradation of corporate profits. Harvard University, working paper. 34 Desai, M., Dharmapala, D., 2006. Corporate tax avoidance and high-powered incentives.

We examine whether internal governance affects the extent of real earnings management in U.S. corporations. Internal governance refers to the process through which key subordinate executives provide checks and balances in the organization and affect corporate decisions. Using the number of years to retirement to capture key subordinate executives' horizon incentives and using their compensation relative to CEO compensation to capture their influence within the firm, we find that the extent of real earnings management decreases with key subordinate executives' horizon and influence. The results are robust to alternative measures of internal governance and to various approaches used to address potential endogeneity, including a difference-in-differences approach. In cross-sectional analyses, we find that the effect of internal governance is stronger for firms with more complex operations where key subordinate executives' contribution is higher, is enhanced when CEOs are less powerful, is weaker when the capital markets benefit of meeting or beating earnings benchmarks is higher, and is stronger in the post-SOX period. This paper contributes to the literature by examining how internal governance affects the extent of real earnings management and by shedding light on how the members of the management team work together in shaping financial reporting quality. JEL Classifications: G32; M40.

SUMMARY Using an international sample of firms from 31 countries, we study the relation between auditor quality and corporate tax aggressiveness. Employing an indicator variable for tax aggressiveness when the firm's corporate tax avoidance measure is within the top quintile of each country-industry combination, we find strong evidence that auditor quality is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home-country tax system characteristics. We also find that the negative relation between auditor quality and the likelihood of tax aggressiveness is more pronounced in countries where investor protection is stronger, auditor litigation risk is higher, the audit environment is better, and capital market pressure is higher. JEL Classifications: M42; M48; H20; F30.

No abstract

No abstract