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Published in: Review of Quantitative Finance and Accounting 1/2014

01-01-2014 | Original Research

Corporate tax avoidance and the timeliness of annual earnings announcements

Authors: Aaron D. Crabtree, Thomas R. Kubick

Published in: Review of Quantitative Finance and Accounting | Issue 1/2014

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Abstract

Consistent with an agency theory of tax avoidance, this study investigates the extent to which tax avoidance results in a less timely annual earnings announcement. Using 16,340 firm-years spanning the period 1993–2010, evidence is presented suggesting tax avoidance that manifests through greater temporary and permanent book-tax differences results in a less timely annual earnings announcement. This result is robust to including several controls previously documented to affect reporting delay, including the magnitude of the earnings surprise, size, profitability, auditor-related influences, shareholder composition, capital intensity, financial reporting aggressiveness and financial condition. Evidence is also presented suggesting that tax avoidance impacts the value-relevance of earnings to investors at the announcement date, evaluated by the earnings response coefficient.

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Footnotes
1
Technically, the hypothesis was ‘good news during, bad news after' in Patell and Wolfson's (1982) study. It has subsequently evolved into ‘good news early, bad news late' as subsequent research has taken a broader focus.
 
2
Studies such as Skinner (1994), Soffer et al. (2000), Miller (2005), Baginski et al. (2008), and Kothari et al. (2009) examine voluntary disclosure behavior around earnings announcments.
 
3
In qualitative responses, they note "…numerous qualitative comments received overwhelmingly suggest lower-than-expected earnings will prompt the firm to release information earlier…" (p. 65).
 
4
This result does not hold for firms reporting positive unexpected earnings. That is, there is no market related incentive to issue earlier earnings announcements for firms with positive unexpected earnings.
 
5
Chai and Tung (2002), using a sample of firms during the period 1991–1994, provide evidence suggesting firms that delayed reported earnings engage in higher levels of income-decreasing discretionary accruals. This allows the firm an opportunity to take a larger negative hit now and allow for better results in the future (relative to the current year) and benefit from the reversing effect of discretionary accruals.
 
6
Since firms that have reported losses, or are in a net refund due position at year-end, may be in an intrinsically different tax position relative to more profitable firms, observations that have negative pretax book income, negative total tax expense, or negative cash taxes paid are excluded from the sample.
 
7
Specifically, DTAX is measured by regressing permanent differences on intangibles, unconsolidated earnings, non-controlling interest in earnings, the change in net operating loss during the period, and lagged permanent differences. Further, this regression is estimated by industry (two-digit SIC) and year. Industry-years are required to contain at least 15 firm-level observations in order to obtain a valid estimate of DTAX.
 
8
We follow extant research (e.g., Francis et al. 1994; Shu 2000; Field et al. 2005; Rogers and Stocken 2005; Dopuch et al. 2008; Zhao et al. 2009) and define LIT equal to one if firms have the following SIC codes: 2833–3836, 3570–3577, 3600–3674, 5200–5961, 7370–7374.
 
9
We include market-to-book ratio to control for any systematic reporting tendencies high growth firms may exhibit due to growth opportunities or litigation risk.
 
10
Specifically, following Zmijewski (1984, p. 69), DISTRESS = − 4.336 − 4.513 × ROA + 5.679 × LEV + 0.004 × CR, where CR equals the firm's current ratio (current assets/current liabilities).
 
11
We control for possible industry effects due to industry-level variation in effective tax rates documented in prior research (Dyreng et al. 2008). In terms of our tax avoidance measures, Agriculture, Mining, Oil, and Construction industries reported the largest BTD, while Manufacturing, Machinery and Electronics and Services had the largest values for DTAX.
 
12
Parameter estimates used in the market model to measure the abnormal return surrounding the annual earnings announcement date are obtained during a period ending 10 days prior to the earnings announcement date.
 
13
Most of the firms in OPIN (99.998 %) report an unqualified audit opinion with explanatory language. A very small percentage (less than .002%) of firms in OPIN report no audit opinion. There are no firms in our sample that report an adverse opinion.
 
14
In Sect. 4.3, we confirm our results are robust to using the Fama and French (1997) industry classification scheme in lieu of two-digit SIC. .
 
15
The variance inflation factors ("VIFs") among independent variables of interest in the regression model are all less than 2.
 
16
In untabulated analyses, we estimate Eq. (1) using ETR and CETR as tax avoidance proxies and do not observe statistical significance. The effective tax rate (ETR) is affected by financial reporting conventions (through total tax expense) and the cash effective tax rate (CETR) does not distinguish between cash taxes paid and the timing of the tax liability. Thus, the effective tax rate measures are arguably noisy and, not surprisingly, do not exhibit a relation to financial reporting delay.
 
17
All p values are two-tailed.
 
18
Results do not change when FYE and SHARE are omitted from the analysis.
 
19
In untabulated analyses, all multivariate regressions are estimated using the Fama and French (1997) industry classification scheme in lieu of two-digit SIC code. Results are unchanged. Statistical significance of the parameter estimates on BTD and DTAX, however, are higher (less than 5% significance level).
 
20
In untabulated tests, one observes a diminished earnings response coefficient using ETR as a tax avoidance proxy. When examining only quintile 1 (lowest tax avoidance) and quintile 5 (highest tax avoidance). A similar finding is observed for CETR, though the smallest earnings response coefficient is obtained in the highest tax avoidance quintile.
 
21
Results are similar using the Fama and French (1997) industry classification scheme in lieu of two-digit SIC code.
 
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Metadata
Title
Corporate tax avoidance and the timeliness of annual earnings announcements
Authors
Aaron D. Crabtree
Thomas R. Kubick
Publication date
01-01-2014
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 1/2014
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-012-0333-9

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