Corporate Tax Planning: Bauer research analyzes if analysts matter

Published on February 2, 2018

Novia Chen

It’s been a busy decade of mergers and closures for brokerage firms.

Assistant Professor Novia Chen, a Bauer College researcher from the Department of Accountancy & Taxation, wanted to know how the phenomenon might affect corporate tax practices.

In “Do analysts matter for corporate tax planning? Evidence from a natural experiment,” published by Chen and two co-authors in Contemporary Accounting Research, the researchers found that when a business is no longer monitored by a sell-side analyst or Equity Research Analyst, it can be a red flag for overly aggressive tax planning.

“We found that on average, firms affected by broker mergers and/or closures experienced a reduction in their effective tax rates of 2.5 percent relative to control firms, translating into an average tax expense savings of $34 million,” Chen said.

Chen is one of many faculty members in the Bauer College Department who study various aspects of corporate tax law.

The reduction in tax rate suggests that when a financial adviser is no longer performing a security analysis role, or has taken on a less influential role, companies take on more tax aggressive policies, Chen says. The effect is more pronounced if the sell-side analyst was highly skilled, and consistently gave accurate advice, she adds.

“The key takeaway is that with fewer analysts watching, the firm is going to be more tax aggressive,” Chen says. “So if the analyst is of high quality, and they always make an accurate earnings forecast, or are able to spend more time working in the tax area, the main impact will be stronger.”