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Drake, Katharine D.; Hamilton, Russ; Lusch, Stephen J.
Journal of accounting & economics, August 2020, 2020-08-00, Letnik: 70, Številka: 1Journal Article
Effective tax rates (ETRs) are often used to compare tax avoidance across firms and time. Using firms' detailed tax footnote data, we find that the effect of valuation allowances (VA) related to prior-period losses biases GAAP ETRs. This downward bias explains almost all of the downward trend in domestic firms' ETRs over the last 20 years. We also find that VAs explain cross-sectional differences in ETRs for both domestic and multinational firms. We show this bias extends to cash ETRs and the Henry and Sansing (2018) tax avoidance measure. We develop a methodology for substantially reducing the bias in both time-series and cross-sectional analyses of cash and GAAP ETRs. Overall, our results suggest firms’ loss histories and GAAP rules influence inferences from tax avoidance proxies. •We provide large-scale detail of the components of firms' GAAP ETR reconciliations, revealing insights about the levels and trends in tax avoidance.•We document a downward bias in ETRs from VA releases for both domestic and multinational firms.•We find that declines in domestic firm GAAP ETRs are primarily a function of GAAP accounting rules for valuation allowance releases, rather than deliberate tax planning.•We create a measure of the probability of VA release to mitigate downward ETR biases associated with VA releases in profitable firm-years.•We show that incorporating the probability of a VA release improves the explanatory power of traditional cross-sectional tax avoidance models by 16–57 percent.
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Leto | Faktor vpliva | Izdaja | Kategorija | Razvrstitev | ||||
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JCR | SNIP | JCR | SNIP | JCR | SNIP | JCR | SNIP |
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in: SICRIS
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