Financial Accounting Effects of Tax Aggressiveness: Contracting and Measurement


  • Accepted by Lillian Mills. We thank Scott Dyreng, Robert Eger, two anonymous reviewers, and workshop participants at Florida State University, the 2010 American Taxation Association midyear meeting, the 2010 American Accounting Association annual meeting, the 2010 National Tax Association Annual Conference on Taxation, and the 2011 Bauer Accounting Research Symposium (University of Houston) for helpful comments.


This study examines a setting in which a tax-reporting decision is delegated to a firm's tax manager. Using financial accounting measures of tax expense to evaluate the tax manager allows the firm to efficiently attain the level of tax avoidance it prefers, despite the fact that the consequences of the tax-reporting decision will occur in the future. The study also examines how well two accounting measures of tax aggressiveness — cash taxes paid and the unrecognized tax benefit — distinguish between conservative and aggressive firms.