Do Analysts Matter for Corporate Tax Planning? Evidence from a Natural Experiment

54 Pages Posted: 3 Feb 2021

See all articles by Novia (Xi) Chen

Novia (Xi) Chen

University of Houston - Department of Accountancy & Taxation

Peng-Chia Chiu

The Chinese University of Hong Kong, Shenzhen

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: November 28, 2017

Abstract

We exploit an exogenous shock to analyst coverage as a result of brokerage house mergers and closures to examine whether financial analysts influence the tax-planning activities of the firms they cover. Using a difference-in-differences design, we find that, on average, firms affected by broker mergers and/or closures experience a reduction in their GAAP (cash) effective tax rates of 2.5 percent (2.6 percent), relative to control firms, translating into average tax expense (cash tax) savings of $34 ($35) million. The treatment effect is more pronounced among firms with lower pre-event analyst coverage. To explore how analysts affect tax planning, we further document that the treatment effect is greater among firms that lose an analyst who provided an implied ETR forecast in the past, suggesting that analysts influence tax planning via their tax-specific research efforts. In addition, we find that, after merger/closure, weakly governed firms increase their use of aggressive tax strategies, and financially distressed firms experience a larger reduction of cash effective tax rates, relative to control firms. Overall, we provide evidence that a shock to analyst coverage sufficiently changes the cost-benefit tradeoff of tax planning.

Keywords: Tax Planning, Analyst Coverage, Information Asymmetry, External Monitoring

JEL Classification: M41

Suggested Citation

Chen, Novia (Xi) and Chiu, Peng-Chia and Shevlin, Terry J. and Shevlin, Terry J., Do Analysts Matter for Corporate Tax Planning? Evidence from a Natural Experiment (November 28, 2017). Contemporary Accounting Research, Vol. 35, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3742151

Novia (Xi) Chen (Contact Author)

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Peng-Chia Chiu

The Chinese University of Hong Kong, Shenzhen ( email )

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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