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Is tax aggressiveness associated with tax litigation risk? Evidence from D&O Insurance

Author

Listed:
  • Dain C. Donelson

    (University of Iowa)

  • Jennifer L. Glenn

    (The Ohio State University)

  • Christopher G. Yust

    (Texas A&M University)

Abstract

This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax aggressiveness and tax litigation risk. D&O insurance covers litigation costs for tax-related cases. Thus D&O insurance premiums provide an independent and direct assessment of the risk in a firm’s tax aggressive strategies, which mitigates some of the challenges in studying tax risk. Based on pricing decisions, D&O insurers appear to view tax aggressiveness, as measured by industry- and size-adjusted cash effective tax rates (a measure where higher rates are associated with more aggressiveness), as increasing tax-related litigation risk. Regarding tax uncertainty, premiums increase (decrease) as unrecognized tax benefits (UTB-related settlements with tax authorities) increase. Finally, D&O insurers focus on firms with outbound tax haven activity when pricing tax aggressiveness. Overall, this suggests D&O insurers include aspects of both low taxes and tax uncertainty when pricing tax litigation risk.

Suggested Citation

  • Dain C. Donelson & Jennifer L. Glenn & Christopher G. Yust, 2022. "Is tax aggressiveness associated with tax litigation risk? Evidence from D&O Insurance," Review of Accounting Studies, Springer, vol. 27(2), pages 519-569, June.
    • Handle: RePEc:spr:reaccs:v:27:y:2022:i:2:d:10.1007_s11142-021-09612-w
    DOI: 10.1007/s11142-021-09612-w
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    Cited by:

    1. Challoumis Constantinos, 2023. "Risk on the Tax System of the E.U. from 2016 to 2022," Economics, Sciendo, vol. 11(s1), pages 55-72, December.
    2. Xia, Changyuan & Yang, Junjie & Yang, Zeng & Chan, Kam C., 2023. "Do directors with foreign experience increase the corporate demand for directors' and officers' liability insurance? Evidence from China," Economic Modelling, Elsevier, vol. 119(C).

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