Examining Tax Strategy Choice

Abstract

ABSTRACT Most recent tax research examines the level of firms’ effective tax rates (ETRs), focusing on tax avoidance. However, theoretical work and research on book-tax tradeoffs and reputational costs indicate that some firms have other tax planning goals. Moreover, anecdotal evidence suggests that consistent tax outcomes are important; therefore, the volatility of ETRs may be an alternative aspect of firms’ tax planning. In this study, I find that some firms utilize a second, distinct approach to tax strategy—maintaining low ETR volatility—by documenting systematic differences in firm characteristics associated with each tax strategy approach and a predictable shift in characteristics when firms change tax strategies. In combination, these results identify at least two distinct approaches to tax strategy. I also find that firms exhibiting low ETR volatility earn significantly higher median buy-and-hold returns than firms exhibiting low ETR levels, consistent with benefits to alternative tax strategies. Data Availability: Data used in this study are available from public sources identified in the paper. JEL Classifications: M40; M41; M49.