The Incidence, Valuation and Management of Tax-related Reputational Costs: Evidence from a Period of Protest

The Journal of the American Taxation Association, Accepted

55 Pages Posted: 9 Apr 2016 Last revised: 20 Jun 2021

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Theodore H. Goodman

Purdue University - Department of Accounting

P.J. Hoffman

Indiana University - Kelley School of Business - Department of Accounting

Casey M. Schwab

University of North Texas

Date Written: May 17, 2017

Abstract

We examine the incidence, valuation and management of tax-related reputational costs during 2011, a year of extensive social protest that temporarily increased scrutiny of corporate tax avoidance. We report three main results. First, tax avoidance is positively associated with negative media sentiment during the protest period (i.e., 2011). Second, a hedge portfolio long (short) in low (high) tax avoidance firms generates positive abnormal returns during the protest period. Third, firms experiencing the largest reputational costs during the protest period report higher tax rates in subsequent years. Supplemental analyses indicate tax-related media coverage increased during the protest period, and that the results are unlikely driven by political costs or other time-invariant firm characteristics. Our findings suggest that tax-related reputational costs are not pervasive. Instead, these costs only occur during periods of unusually high scrutiny, which helps explain prior studies’ difficulties in providing large-sample evidence of tax-related reputational costs.

Keywords: tax avoidance, reputational costs, media attention

JEL Classification: H2, H25, H26, E62, M4, M41

Suggested Citation

Dhaliwal, Dan S. and Goodman, Theodore H. and Hoffman, P.J. and Schwab, Casey M., The Incidence, Valuation and Management of Tax-related Reputational Costs: Evidence from a Period of Protest (May 17, 2017). The Journal of the American Taxation Association, Accepted, Available at SSRN: https://ssrn.com/abstract=2760366 or http://dx.doi.org/10.2139/ssrn.2760366

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Theodore H. Goodman

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

P.J. Hoffman

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Casey M. Schwab (Contact Author)

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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