The effect of media on corporate tax avoidance

Abstract

Recent studies have suggested the presence of an optimal tax avoidance level. Tax avoidance adds to shareholders' wealth, but with the increase of tax aggressiveness, the benefits may be offset by the agency, reputational, or enforcement costs. On the other hand, prior studies suggest that the media influences firms to improve their performance or correct misbehaviors through magnifying reputational costs and increasing stock price pressures. Accordingly, this study hypothesizes that the media, measured in the degrees of coverage and negative sentiment, motivates firms to adjust their tax avoidance levels down (up) if they were (were not) aggressive in avoiding taxes. Using the sample of U.S. public-listed firms for the period 2000 - 2016, I find that the effect of negative media sentiment on tax avoidance is consistent with my hypothesis, while I find no effect of media coverage on tax avoidance. In mediation analyses, I prove the reputational and enforcement costs mechanism through which negative media sentiment deters firms from tax aggressiveness. In cross-sectional analyses, I find that the effect of negative media sentiment on tax avoidance is more prominent for those firms who are more sensitive to reputational losses and capital market pressure. Finally, I hand-collect tax avoidance news articles and find that they have a deterrent effect on tax aggressiveness only when firms have negative media sentiment. Overall, the finding of this study suggests that the media serves a monitoring role in corporate tax avoidance.