Performance Aspirations and Corporate Tax Avoidance

Abstract

The current study examines whether performance discrepancy from the aspiration level affects corporate tax avoidance. Prior studies show that performance discrepancies from the aspiration level significantly affect firms' behavior; thus, it is important to examine whether such discrepancies affect corporate tax avoidance. Based on the behavioral theory of the firm (BTOF), this study posits that firms performing below the aspiration levels avoid more taxes in the subsequent period than other firms. Empirical findings using data from a sample of U.S. firms for the period covering 1993-2016 support the hypothesis. The findings also show that, while there is a difference among firms meeting or beating the aspiration level, there is no statistically significant difference in tax avoidance level among firms performing short of their aspiration level. The study contributes to the existing literature by providing additional evidence extending the scope of literature in BTOF and tax avoidance areas.