Author(s): Jaeyon Chu, Grace Iljoo Kang
This study examines the association between analysts’ information properties and corporate tax avoidance. Using analysts’ coverage and forecast accuracy as a proxy for analysts’ information properties, we find that analysts’ following does not affect corporate tax aggressiveness while their forecast accuracy reduces extreme corporate tax avoidance and the agency problem between management and shareholders. To examine whether analysts’ monitoring role affects firms’ level of corporate tax avoidance, we partition sample into firms with high levels of corporate tax avoidance and those with low levels of corporate tax avoidance compared to the industry average. We find that analysts encourage management to avoid extreme levels of tax avoidance activities. On the other hand, for firms with low levels of tax avoidance, analysts encourage the management to reduce tax expense and increase the earnings to meet the earnings estimates to be aligned with shareholder’s interests. We conjecture that analysts’ monitoring role will be stronger when institutional or foreign investors monitor the firm as an external corporate governance mechanism. Consistent with the prediction, analysts’ monitoring role is more pronounced when firms have strong corporate governance.