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Do Analysts Matter for Corporate Tax Planning? Evidence from a Natural Experiment
Author(s) -
Chen Novia X.,
Chiu PengChia,
Shevlin Terry
Publication year - 2018
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12413
Subject(s) - tax planning , natural experiment , business , monetary economics , cash , shock (circulatory) , corporate tax , difference in differences , finance , accounting , economics , tax avoidance , double taxation , econometrics , statistics , mathematics , medicine
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 (ETR) 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 trade‐off of tax planning.