The impact of corporate tax avoidance on analyst coverage and forecasts

Abstract

Corporate tax avoidance is likely to be associated with a high level of earnings management and with high financial opacity in the time-series. On this basis, we hypothesize that analyst coverage is negatively associated with corporate tax avoidance. Our results confirm this conjecture, and are robust to using a firm-fixed-effects model and a quasi-natural experiment to control for potential endogeneity. Additional analysis shows that analyst coverage is negatively related to tax risk, but there is no evidence that the informativeness of, or errors in, analyst forecasts are associated with tax avoidance. Overall, our study advances understanding of the implications of corporate tax avoidance for analyst behavior.