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The impact of large tax settlement favorability on firms’ subsequent tax avoidance

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  • Andrew R. Finley

    (Claremont McKenna College)

Abstract

I consider how large tax settlements compare to management expectations and then test how the favorability of a resolution (from the firm’s perspective) affects subsequent tax avoidance. Using unrecognized tax benefit information disclosed in firms’ tax footnotes, pursuant to FIN 48, I develop and validate a measure of large tax settlement favorability. I find that firms with relatively favorable settlements subsequently increase their tax avoidance but that firms with relatively unfavorable settlements do not change their behavior. The implication is that favorable settlements inform management of weak tax monitoring or opportunities to avoid additional taxes. In additional analysis, I find that increasingly unfavorable settlements are positively associated with the likelihood of a tax-related restatement announcement. Overall, these findings illustrate how tax settlement favorability has reporting consequences for both subsequent tax returns and the financial statements.

Suggested Citation

  • Andrew R. Finley, 2019. "The impact of large tax settlement favorability on firms’ subsequent tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 156-187, March.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:1:d:10.1007_s11142-018-9471-1
    DOI: 10.1007/s11142-018-9471-1
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    3. Eberhartinger, Eva & Safaei, Reyhaneh & Sureth, Caren & Wu, Yuchen, 2021. "Are risk-based tax audit stretegies rewarded? An analysis of corporate tax avoidance," arqus Discussion Papers in Quantitative Tax Research 267, arqus - Arbeitskreis Quantitative Steuerlehre.

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