Reputational Costs Of Tax Avoidance

Question 1

Libby box

Answer 1

Cause - tax sheltering / tax evasion / tax aggressiveness
Effect - (expected) reputational costs
Cause - caught being a shelter firm (and caught-year)
Effect - stock price
-CEO/CFO Turnover
- change in sales & advertising expense
- public media
- tax authorities

Controls - firm characteristics (eg size) industry, firm performance, executive characteristics

Question 2

Hypothesis

Answer 2

H1: Firms and their executives bear reputational costs from engaging in aggressive tax avoidance / shelter activities

Question 3

In table 3 interpret the estimated 3 day CAR value of -0.75%

Answer 3

• the estimated three-day CAR is calculated by multiplying the coefficient on the interaction term CAUGHTYEAR * CAUGHTPERIOD by 3
• the samples mean estimated three-day cumulative abnormal return is -0.75%
• three days around the date revealing that treatment firm had engaged in a tax shelter, this firm can expect a cumulative abnormal return of -0.75% on average

Question 4

In figure 1 describe what can be seen in the figure (x and y graph). Interpret the meaning in your own words

Answer 4

Description :
- the x axis denotes the day through which the cumulative abnormal return was calculated , with day 0 being the day the shelter was revealed
- the y axis denotes the cumulative abnormal return
- course of the graph : material increases in negative CAR within 30 days after day 0

Interpretation :
- tax shelter revelations have only a temporary effect (decrease of stock prices) on the capital market

Question 5

Give table 4 - assign values to each coefficient and write the model with these coefficient values. Then describe how the coefficient value of the variable CAUGHTFIRM*CAUGHTYEAR is to be interpreted

Answer 5

• CEO TURNOVER i,t = -0.020* CAUGHTFIRM i - 0.599 * CAUGHTYEAR i,t + 0.771 * CAUGHTFIRM * CAUGHTYEAR i,t

-(C*C) results show a positive (0.771) but statistically non - significant coefficient
-no evidence that revealed shelter forms experience a significantly higher likelihood of CEO turnover

Question 6

Two research projects which investigate corporate reputation

Answer 6

1 literature on tax avoidance and tax shelters