preview

Corporate tax avoidance and Benford's Law

Powerful Essays
I will test the hypothesis in this study based on the results of the t-test on the digit with an unusually high frequency in the financial statements of avoiders. As mentioned above, the test sample will be used in a regression model to see if the finding of the first test is correct and persists when controls are included for firm characteristics which are associated with cash effective tax rates. More specifically, firm characteristics which have been proven to be a determinant of corporate tax avoidance in prior research.
The following regression model is estimated to test the hypothesis stated in this study:

CASH ETRi,t = β0 + β1HIGH FREQi,t + β2ROAi,t + β3LEVi,t + β4NOLi,t + β5∆NOLi,t +β6FIi,t + β7PPEi,t + β8INTANGi,t + β9EQINCi,t + β10SIZEi,t-1 +β11MBi,t-1 +YearDummies + IndustryDummies + ɛ

In this study I will use the cash effective tax rate (CASH ETR) as a proxy for corporate tax avoidance. Chen et al. (2010) use the cash effective tax rate as one of the measures of tax aggressiveness in their study. Another effective tax rate measure which has been widely used in tax avoidance research is the GAAP effective tax rate. However, the GAAP effective tax rate only reflects the permanent book-tax differences, while the CASH ETR reflects both the temporary and permanent book-tax differences (Chen et al. 2010). Moreover, the CASH ETR captures the tax benefits of employee stock options, while the GAAP effective tax rate does not (Dyreng et al. 2008). The CASH ETR also captures the strategies that are used to defer taxes while the GAAP effective tax rate does not (Hanlon and Heitzman 2010). The GAAP effective tax rate is also affected by changes in estimate while the CASH ETR is not. Therefore, Dyreng et al. (2008) conclude that t...

... middle of paper ...

...3). Effective corporate tax rates the effect of size, capital intensity, leverage, and other factors. Journal of Accounting and Public Policy,
1(2), 125-152.
Thomas, J. K. (1989). Unusual patterns in reported earnings. Accounting Review, 773-787.
Van Caneghem, T. (2002). Earnings management induced by cognitive reference points. The
British Accounting Review, 34(2), 167-178.
Varian, Hal, 1972, Benford's Law (Letters to the Editor), The American Statistician 26, 65.
Wallace, W. A. (2002). Assessing the quality of data used for benchmarking and decision making. Journal of Government Financial Management, 51(3), 16-23.
Watrin, C., Struffert, R., & Ullmann, R. (2008). Benford’s Law: an instrument for selecting tax audit targets?. Review of Managerial Science, 2(3), 219-237.
Zimmerman, J. L. (1983). Taxes and firm size. Journal of accounting and economics, 5, 119
149.
Get Access