Does Tax Avoidance Impair Accounting Comparability?

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Abstract

This paper examines the relationship between tax avoidance and accounting comparability. We argue that aggressive tax behavior impairs the comparability of financial statements by altering the accounting function, which maps economic events into accounting data. Using raw and industry-adjusted effective tax rates to proxy tax avoidance, we find that firms with more aggressive tax avoidance strategies have substantially lower accounting comparability. The evidence also shows that the negative effect of tax avoidance on accounting comparability is driven by firms with aggressive tax planning strategies beyond the industry norm. Furthermore, using an alternative measure of accounting comparability as a function of pre-tax income, we continue to find evidence of the negative effect of tax avoidance behavior. Importantly, this provides evidence that the effect of aggressive tax planning is not limited to the reported tax expense, but affects the comparability of the overall financial reporting system. Our results contribute to the literature on the costs of tax avoidance and on the determinants of accounting comparability.
Original languageEnglish
Number of pages68
JournalJournal of Accounting Literature
Early online date3 Aug 2023
DOIs
Publication statusE-pub ahead of print - 3 Aug 2023

Bibliographical note

Funding: Peiwei Lyu would like to thank the China Scholarship Council (CSC) for their financial support.

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