Monitoring or Pressure: The Impact of Analyst Coverage on Corporate Tax Avoidance

• In Event: Research with Analysts Forecasts

Abstract

We examine the impact of analyst coverage on corporate tax avoidance. Prior literature suggests two opposite effects of financial analysts: the monitoring view emphasizes the mitigating effect, whereas the pressure view suggests the exacerbating effect. Our baseline tests find a negative association between analyst coverage and tax avoidance. To mitigate endogeneity concerns, we perform 1) a difference-in-differences analysis using a setting of brokerage house mergers which cause exogenous decreases in analyst coverage, and 2) an instrumental variable two-stage least squares analysis. Both these tests suggest a negative causal effect of analyst coverage on tax avoidance. Additional tests show that the monitoring effect of analyst coverage is concentrated among firms with weak governance, and the effect is not mitigated even when firms are under higher market pressure from analysts. Our study is the first to document evidence that financial analysts play an important monitoring role in mitigating corporate tax avoidance.

Authors

• Qiang Wu, Rensselaer Polytechnic Institute

• Yijiang Zhao, American University

• Arthur Allen, University of Nebraska-Lincoln

• Bill Francis, Rensselaer Polytechnic Institute