Tuesday, March 7, 2006
This paper reviews recent evidence analyzing the link between earnings management and corporate tax avoidance. A real-world tax shelter is dissected to illustrate how tax shelter products enable managers to manipulate reported earnings. A stylized example is developed that generalizes this view of corporate tax avoidance and empirical evidence consistent with this view is also discussed. The paper concludes by considering the implications of this view for how shareholders and boards should view managerial efforts to reduce corporate tax obligations.