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Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit

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  • Jason DeBacker
  • Bradley T. Heim
  • Anh Tran
  • Alexander Yuskavage

Abstract

Contrary to common expectations, legal enforcement may increase subsequent corporate misbehavior. Using Internal Revenue Service and financial statement data, we find that corporations gradually increase their tax aggressiveness for a few years following an audit and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and with Bayesian updating of audit risk. This adverse effect on corporate behavior calls for a reexamination of both the theory and policy of legal enforcement.

Suggested Citation

  • Jason DeBacker & Bradley T. Heim & Anh Tran & Alexander Yuskavage, 2015. "Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit," Journal of Law and Economics, University of Chicago Press, vol. 58(2), pages 291-324.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/684037
    DOI: 10.1086/684037
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