Information processing costs and corporate tax avoidance: Evidence from the SEC’s XBRL mandate

Authors

Jeff Z. Chen
Hyun Hong
Jeong-Bon Kim
Ji Woo Ryou, The University of Texas Rio Grande Valley

Document Type

Article

Publication Date

4-2021

Abstract

The IRS uses information contained in financial statements as well as tax returns to detect tax avoidance behavior. We examine the impact on corporate tax avoidance behavior of reductions in the IRS’s information processing costs resulting from the mandatory adoption of XBRL for financial reporting. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL reporting for small firms, we pay particular attention to small firms, which inherently have relatively high information frictions. We find that the adoption of XBRL for financial reporting results in a significant decrease in tax avoidance. We further find that the negative relation between XBRL reporting and tax avoidance is less prominent for firms subject to more intense IRS monitoring in the pre-XBRL-reporting period. Overall, our results suggest that XBRL reporting reduces the cost of IRS monitoring in terms of information processing, which dampens managerial incentives to engage in tax avoidance behavior.

Comments

Original published version available at https://doi.org/10.1016/j.jaccpubpol.2021.106822

Recommended Citation

Chen, J.Z., Hong, H.A., Kim, J.B. and Ryou, J.W., 2021. Information processing costs and corporate tax avoidance: Evidence from the SEC’s XBRL mandate. Journal of Accounting and Public Policy, 40(2), p.106822. https://doi.org/10.1016/j.jaccpubpol.2021.106822

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Publication Title

Journal of Accounting and Public Policy

DOI

10.1016/j.jaccpubpol.2021.106822