Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers

Huimin (Amy) Chen, Bill B. Francis, Qiang Wu, Yijiang Zhao

Research output: Journal article publicationJournal articleAcademic researchpeer-review

4 Citations (Scopus)

Abstract

We examine whether and how industry peers use tax avoidance as a strategic mechanism to maintain their relative competitive positions. We exploit a unique setting where a relatively large private firm obtains capital, visibility, and creditability by going public (i.e., an IPO), imposing significant competitive pressure on its industry peers. We find that peer firms increase tax avoidance after large IPOs. Further analysis shows that the increase of tax avoidance is driven by firms with high growth needs and firms with high operating uncertainty, suggesting that tax aggressiveness is aligned with other strategic risk-taking changes to improve industry competitiveness. We rule out two alternative explanations: 1) existing peers use relative product market power to hedge against tax risk and engage in tax avoidance; 2) peers mimic the tax avoidance behavior of IPO firms. The main finding is supported by the difference-in-differences test with coarsened exact matching and a battery of robustness tests, including alternative measures and alternative large IPO selection criteria.

Original languageEnglish
Article number101187
JournalBritish Accounting Review
Volume55
Issue number3
DOIs
Publication statusPublished - May 2023

ASJC Scopus subject areas

  • Accounting

Fingerprint

Dive into the research topics of 'Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers'. Together they form a unique fingerprint.

Cite this