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Managers, subject to agency conflicts, may deviate from the optimal level of tax aggressiveness that shareholders would prefer. We use the SEC’s XBRL mandate to draw causal inferences about the relation between investors’ information processing costs and shareholder monitoring of managers’ tax-aggressive behavior. We find that after XBRL reporting which reduces information processing costs to outside stakeholders, firms with low levels of tax avoidance in the pre-XBRL period become more tax-aggressive. In contrast, firms with high levels of tax avoidance are less tax-aggressive after XBRL reporting. These results suggest that reduced information processing costs and stronger shareholder monitoring in the post-XBRL period change tax strategies for firms at both tails of the tax avoidance distribution, which are more likely to signify under- and over-investments in tax avoidance by managers. Further analyses show that the effect of XBRL reporting on extreme levels of tax aggressiveness is stronger for firms with higher information asymmetry and lower competition over information among investors.



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