Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis

By Jeong‐Bon Kim, Yinghua Li, Liandong Zhang. 2011

1,901 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/c2bab4c780b8f9b30eab6a01a426d6c38d6f5b70

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Citations in the corpus

Abnormal real operations, real earnings management, and subsequent crashes in stock prices (2014, unknown): “The notion that negative information hiding leads to price crashes is also consistent with findings in other important crash risk studies (e.g. Kim et al. 2011a, b; Kim and Zhang 2014).”
The Importance of the Internal Information Environment for Tax Avoidance (2015, background): “Kim et al. (2011) find that tax avoidance masks bad news hoarding activities.”
Managerial Ability, Investment Efficiency and Stock Price Crash Risk (2017, unknown): “Some of the determinants of crash risk include poor quality financial reporting (Hutton et al., 2009); auditor-provided tax services and associated earnings manipulation (Habib and Hasan, 2016); tax avoidance (Kim et al., 2011a); and CEO equity incentives (Kim et al., 2011b).”
Institutional Shareholders’ Investment Horizons and Tax Avoidance (2013, unknown): “For example, Kim et al. (2011) argue that corporate tax avoidance activities assist managers in hiding bad news.”
Large controlling shareholders and stock price synchronicity (2014, unknown): “…influenced by the extent of voluntary disclosure (Haggard et al., 2008), financial statement transparency (Hutton et al., 2009), equity incentives (Kim et al., 2011a), corporate tax avoidance (Kim et al., 2011b), institutional investors (Callen and Fang, 2012), and management earnings guidance…”
The taxman cometh: Does tax uncertainty affect corporate cash holdings? (2017, unknown): “In addition, Kim et al. (2011) find that tax avoidance relates positively to stock price crash risk, based on the idea that tax avoidance creates an opaque environment, leading to rent diversion and hording of bad news.”
Changes in corporate effective tax rates over the past 25 years (2017, unknown): “A great deal of research examines tax avoidance and effective tax rates, but almost all of this research examines the cross section of firms (e.g., Chen, Chen, Cheng, and Shevlin, 2010; Desai and Dharmapala, 2006; Kim, Li, and Zhang, 2011 ).”
CEO Overconfidence and Stock Price Crash Risk (2016, methodology): “Following Kim et al. (2011b), we also calculate the three crash risk measures using firm-specific weekly returns over the future two- and three-year periods and find that the relation between CEO overconfidence and future crash risk continues to be positive and significant.”