Jared A. Moore

Tax avoidance, financial experts on the audit committee, and business strategy

We examine whether financial expert audit committee members tailor their approach to overseeing the corporate tax planning process according to the firms business strategy. We predict and find that such directors encourage defender‐type firms (characterized partially by high risk aversion) to engage in more tax avoidance activities and prospector‐type firms (characterized partially by innovation and risk seeking) to scale back on tax avoidance, relative to the opposing strategy type. We also find that both accounting experts and non‐accounting financial experts on the audit committee contribute to our results to some extent, although the effects of non‐accounting financial experts present more consistently. Overall, our results suggest that financial experts on the audit committee tend to play more of an advising role for defenders and more of a monitoring role for prospectors, relative to one another.

Tax Policy Uncertainty and Stock Return Volatility

We investigate whether uncertainty surrounding tax policy is associated with investors’ perceptions about the riskiness of firms’ tax avoidance strategies, controlling for other sources of general macroeconomic uncertainty. To test our prediction, we rely on long-run cash effective tax rates (ETRs) to identify firms that have maintained relatively low cash ETRs over the prior five years. We then examine how tax policy uncertainty (TPU) and tax avoidance interact in a model of firm risk. Consistent with our prediction, our results indicate that macro-level TPU is positively associated with investors’ perceptions about the riskiness of cash flows stemming from tax planning activities. We perform analyses to evaluate our measure of TPU based on how it correlates with actual tax-related legislative activity, individually and relative to other policy uncertainty indices (debt, spending, entitlements, etc.). The results of these tests provide assurance that our primary measure of interest captures tax-related policy uncertainty. Second, consistent with economic theory which suggests that macro-level policy uncertainty is a source of systematic risk to investors, we predict and find that the interaction between TPU and tax avoidance activity is concentrated primarily in systematic volatility. We further condition our interaction of interest on a proxy for low tax-related information quality (i.e., highly volatile ETRs). Consistent with Rajgopal and Venkatachalam (2011) who argue that idiosyncratic firm risk is, at some level, a function of the firm’s information environment, we find that our interaction of interest is associated with idiosyncratic volatility for firms with lower tax-related information quality.