Editor’s Note: The following post comes to us from Kim Jeong-Bon, Professor of Accountancy at City University of Hong Kong; Yinghua Li of the Accounting Department at Purdue University; and Liandong Zhang of the Department of Accountancy at City University of Hong Kong.
In the paper, Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis, which is forthcoming in the Journal of Financial Economics, we examine the association between the extent of a firm’s tax avoidance and its future stock price crash risk. Recently, Desai, Dyck, and Zingales (2007) and Desai and Dharmapala (2006) put forth a “theft and taxes” idea: Complex tax avoidance arrangements can provide management with the tools, masks, and justifications for rent-diverting activities, such as earnings manipulation, unauthorized compensation, and insider trading. The purpose of our paper is to test this “theft and taxes” idea in the context of stock price crash risk.