Tax avoidance and its relation to accounting conservatism

Abstract

This thesis explores the relationship between tax avoidance and accounting conservatism for publicly listed corporate taxpayers, and whether the relationship differs for conditional and unconditional accounting conservatism. The start of the study followed an archival research design in that it reviewed the literature on research performed in the fields of tax avoidance and accounting conservatism and its two forms. These concepts, both grounded in agency theory, were considered with specific reference to the determinants, and consequences of both tax avoidance and accounting conservatism, as well as the measures used to quantify these phenomena. Then, multivariate regression analyses were performed to explore the relation between tax avoidance and the two forms of accounting conservatism (conditional and unconditional conservatism). The analyses used data for publicly listed United States firms for a period of 26 years, available to the public from the Datastream database. Tax avoidance was measured using non-cash flow based and cash-flow based effective tax rate measures. Accounting conservatism was measured using the NONACC measure (an accruals-based measure) for unconditional conservatism, and the CSCORE measure (an earnings/stock relation measure) for conditional conservatism. The augmented Basu model was also used to establish the relation between tax avoidance and conditional conservatism. The results suggest a negative relation between unconditional conservatism and tax avoidance, and a positive relation between conditional conservatism and tax avoidance. This research provides conceptual frameworks for, and advances the measures of, tax avoidance and accounting conservatism and improves the understanding of the relationship between these phenomena which could assist in identifying firms prone to tax avoidance.