Does Stock Price Crash Risk Subside When the IRS Imposes Stricter Corporate Tax Enforcement?

Does corporate tax aggressiveness explain future stock price crash? Empirical evidence from France

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-01-2020-0018 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Taher Hamza ◽

Elhem ZAATIR

Keyword(s):

Stock Prices ◽

Stock Price ◽

Policy Implications ◽

Crash Risk ◽

Corporate Tax ◽

Price Informativeness ◽

Content Type ◽

Tax Aggressiveness ◽

The Impact

Purpose This study aims to examine the impact of corporate tax aggressiveness on future stock price crash. It also tests the corporate tax aggressiveness prediction power of the stock price crash via a long forecast window (two years). Design/methodology/approach The study sample consisted of 1,169 firm-years observations. The multivariate analysis uses three measures of stock price crash risk, as a dependent variable. The key variable is tax aggressiveness lagged by one period (one year) as all independent variables. As a robustness check, this paper uses alternate measures of earning management and a longer forecast window (two years) to predict stock price crash risk. Findings Tax aggressiveness activity is positively related to a firm-specific future stock price crash. Corporate tax aggressiveness predicts stock price crash risk for a long forecast window (two years). The findings are robust to a number of checks and have several policy implications. Practical implications Investors should be cautious about the different risks of corporate tax aggressiveness: stock price crash risk. The important role of firm disclosure which leads to more relevant stock price informativeness. Adopt accounting conservatism behavior. The market perceives a socially irresponsible behavior and may harm the firm reputation. Social implications Incentives for French regulators to reduce the feeling of injustice by SMEs vis-à-vis large international companies that have the possibility of transferring part of their profits to a country different from that where it should be taxed to reduce their tax bases. Originality/value French companies are among the heavily taxed in Europe which makes France a particularly suitable context for studying tax aggressiveness issues. The first in the French context, that document a significant and positive relation between tax aggressiveness and future crash risk. It focuses on the important role of corporate tax planning as a means of withholding bad news and its consequences in inflating stock prices.

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