Identifying Different Types of Tax Avoidance

What is it about?

We explain how to differentiate corporate tax avoidance from earnings management in empirical tests, since both activities may impact the cash effective tax rate (ETR), a commonly used measure of tax avoidance. We provide a theoretical model of different types of tax avoidance and earnings management, and show how these impact both the cash ETR and an alternative cash-flow based measure. We also provide empirical results to illustrate our approach. This topic is important because differentiating tax avoidance from earnings management should be useful to researchers, tax policymakers and firm stakeholders.

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