How Does Tax Avoidance Affect Corporate Transparency?

This study examines how tax avoidance affects corporate transparency. Using a large sample of U.S. firms from 1995 to 2016, we find a significant non-linear effect of tax avoidance on transparency. That is, when a firm’s tax avoidance is low, an increase in tax avoidance improves transparency; however, when a firm’s tax avoidance is high, an increase in tax avoidance decreases transparency. These results are robust to using alternative measures of transparency and tax avoidance and in several additional tests. Overall, the findings suggest that the effect of tax avoidance on transparency depends on the aggressiveness of firms’ tax avoidance behavior. Our study contributes to the literature on the economic consequences of tax avoidance.