The Importance of IRS Enforcement to Stock Price Crash Risk: The Role of CEO Power and Incentives

• 成果类型: Article
• 署名作者: Bauer, Andrew M.; Fang, Xiaohua; Pittman, Jeffrey A.
• 署名单位: University of Waterloo; State University System of Florida; Florida Atlantic University; Memorial University Newfoundland; Virginia Polytechnic Institute & State University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/TAR-2018-0375
• 发表日期: 2021
• 页码: 81-109
• 关键词: CORPORATE-TAX AVOIDANCE; political connections; earnings management; institutional investors; conditional skewness; JUMP-RISK; performance; OWNERSHIP; MARKET; FIRMS

摘要

We analyze whether tough IRS monitoring generates a positive externality by constraining managers' bad news hoarding activities. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our evidence is consistent with recent theory that outside investors learn more about firms when tax enforcement is stricter. Additionally, path analysis suggests that the monitoring channel (direct path) plays a critical role in shaping crash risk relative to information asymmetry channels of tax planning and accruals manipulation (indirect paths). Consistent with other predictions, we find that the monitoring role of IRS audits intensifies when firms experience worse agency conflicts stemming from CEO power and incentives. Collectively, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have wider scope and stronger incentives to hoard bad news.