Permanent link to Research Commons versionhttps://hdl.handle.net/10289/16430
Prior literature (e.g., Guenther et al., 2017) documents puzzling evidence revealing that tax avoidance activities do not affect firm-specific risk. Using an extended US sample, we find that lower cash effective tax rates (ETRs) are associated with higher future return volatility, supporting the traditional view of tax risk-return trade-off. In sharp contrast to the US evidence, our analysis of Chinese firms suggests that Chinese state-owned enterprises (SOEs) with lower cash and GAAP ETRs tend to have lower future risk. In addition, we adopt a difference-in-differences approach based on the variations generated by two exogenous, antitax avoidance regulations in China but find no evidence suggesting a causal relationship between tax avoidance and firm risk. Overall, our results suggest that the relationship between tax avoidance and risk varies across countries, sample periods and tax aggressiveness measures, and we highlight the importance of addressing the endogenous nature in future research.
This is an author’s accepted version of an article published in Accounting and Finance. © 2021 John Wiley & Sons, Inc.
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