Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns

Product market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show...

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Bibliographic Details
Published in:The Accounting review 2015-03, Vol.90 (2), p.675-702
Main Authors: Kubick, Thomas R., Lynch, Daniel P., Mayberry, Michael A., Omer, Thomas C.
Format: Article
Language:English
Subjects:
Competitive advantage
Corporate taxation
Corporate taxes
Fiscal policy
Market power
Profitability
Public finance
Stock prices
Stock returns
Studies
Tax avoidance
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Summary:Product market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show that firms mimic the tax outcomes of their product market leaders. Among firms with greater product market power and comparatively high cash tax avoidance, we find stock prices to be less informative and that investors require additional compensation for the risks associated with comparatively high cash tax avoidance. Our results survive numerous robustness tests. Overall, our results suggest that industry dynamics, particularly related to a firm's competitive position, play a meaningful role in corporate tax policy.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-50883