Research Snapshots

Corporate tax avoidance and stock price crash risk

Professor Jeong-Bon Kim, Chair Professor and Head of the Department of Accountancy, and Dr Liandong Zhang, Assistant Professor in the Department of Accountancy, and co-author have shown that if corporate managers use tax avoidance transactions to hide bad corporate news for extended periods, it can lead to stock price crashes. The finding is important because the traditional view is that tax avoidance can increase firm value by transferring wealth from the state to shareholders. If firms have strong external monitoring mechanisms such as high institutional ownership and high analyst coverage, the risk of such crashes is lower.

Partially motivated by these findings the American Federation of State, County, and Municipal Employees have requested the boards of directors of many large U.S. companies such as Home Depot, Wal-Mart, Amazon, and Boeing to disclose the risk created by any tax avoidance activities. The research also covers other important topics such as executive compensation, corporate governance, and the quality of financial reporting and voluntary disclosures.

Read more: Kim, Jeong-Bon V., Yinghua Li, and Liandong Zhang. "Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis." Journal of Financial Economics 100 (2011): 639-662. Print.