Journal article
How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?
Contemporary accounting research, Vol.36(3), pp.1824-1860
09/01/2019
DOI: 10.1111/1911-3846.12481
Abstract
The trade-off literature asserts that managers weigh the direct benefits of tax avoidance against the associated nontax costs. This literature implies each firm has a unique optimal level of tax avoidance that balances these costs and benefits. Our study is the first to document how quickly the average firm moves toward its optimal level of tax avoidance. We find that the typical firm converges toward its optimum at a rate that ranges from approximately 69 to 84 percent over a three-year period, depending upon model specifications. Consistent with asymmetric levels of frictions across the tax avoidance distribution, we find the speed of adjustment is greater for firms below their optimal level of tax avoidance than for firms above. We perform additional cross-sectional analyses to provide insight into some of the frictions that prevent firms from adjusting completely to their optimal level of tax avoidance. We generally find growth firms exhibit slower adjustment speeds and provide limited evidence that both multinational firms and income-mobile firms exhibit faster adjustment speeds.
Details
- Title: Subtitle
- How Quickly Do Firms Adjust to Optimal Levels of Tax Avoidance?
- Creators
- Jaewoo Kim - University of RochesterSean T. McGuire - Mitchell InstituteSteven Savoy - University of Illinois at ChicagoRyan Wilson - University of Oregon
- Resource Type
- Journal article
- Publication Details
- Contemporary accounting research, Vol.36(3), pp.1824-1860
- Publisher
- Wiley
- DOI
- 10.1111/1911-3846.12481
- ISSN
- 0823-9150
- eISSN
- 1911-3846
- Number of pages
- 37
- Language
- English
- Date published
- 09/01/2019
- Academic Unit
- Accounting
- Record Identifier
- 9984380535702771
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