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Strategic Deviation and Corporate Tax Avoidance: A Risk Management Perspective

Author

Listed:
  • Ahsan Habib

    (School of Accountancy, Massey University, Auckland 0745, New Zealand)

  • Dinithi Ranasinghe

    (Department of Accountancy and Finance, University of Otago, Otago 9016, New Zealand)

  • Ahesha Perera

    (School of Accountancy, Massey University, Auckland 0745, New Zealand)

Abstract

We examine the association between strategic deviation—defined as the deviation of firms’ resource allocation from that of industry peers—and corporate tax avoidance. By combining the agency perspective with the risk aspect, we argue that managers of firms with high strategic deviation avoid tax compared with those of firms with low strategic deviation. High-strategic-deviant firms who avoid tax are likely to face the risk of compromising firm value. Based on a large sample of 40,168 US firm-year observations for the period 1987–2020, we find evidence supporting our hypothesis. A series of robustness tests validates our main finding. We further provide evidence to suggest that the positive association between strategic deviation and tax avoidance is stronger for deviant firms with high financial constraints, low institutional ownership, firms operating in more competitive markets, and procuring higher auditor provided tax services from incumbent auditors. Importantly, we show that the capital market penalises tax avoidance strategies undertaken by the deviant firms.

Suggested Citation

  • Ahsan Habib & Dinithi Ranasinghe & Ahesha Perera, 2024. "Strategic Deviation and Corporate Tax Avoidance: A Risk Management Perspective," JRFM, MDPI, vol. 17(4), pages 1-24, April.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:144-:d:1369996
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    References listed on IDEAS

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