The Incidence, Valuation and Management of Tax-related Reputational Costs : Evidence from a Period of Protest

We examine the incidence, valuation and management of tax-related reputational costs during 2011, a year containing numerous protests that increased scrutiny of corporate tax avoidance. We report three main results. First, consistent with firms incurring tax-related reputational costs, we find that tax avoidance is positively associated with negative media sentiment during the protest period (i.e., 2011). Second, consistent with tax-related reputational costs reducing firm value, we find that a hedge portfolio long (short) in low (high) tax avoidance firms generates significant positive abnormal returns during the protest period. Third, consistent with firms managing reputational damage, we find that firms experiencing the largest reputational costs during the protest period exhibit higher tax rates in the following years. In supplemental analyses, we provide assurance that our results are due to reputational costs and not political costs by re-estimating our analyses after excluding firms operating in politically-sensitive industries; all inferences hold. We also conduct placebo analyses to confirm that our results only exist during the protest period. Collectively, this study provides evidence that firms incur tax-related reputational costs, but only during periods of increased scrutiny