Is tax aggressiveness associated with tax litigation risk? Evidence from D&O Insurance

Dain Donelson (), Jennifer L. Glenn () and Christopher G. Yust ()
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Jennifer L. Glenn: The Ohio State University
Christopher G. Yust: Texas A&M University

Review of Accounting Studies, 2022, vol. 27, issue 2, No 4, 519-569

Abstract: Abstract This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax aggressiveness and tax litigation risk. D&O insurance covers litigation costs for tax-related cases. Thus D&O insurance premiums provide an independent and direct assessment of the risk in a firm’s tax aggressive strategies, which mitigates some of the challenges in studying tax risk. Based on pricing decisions, D&O insurers appear to view tax aggressiveness, as measured by industry- and size-adjusted cash effective tax rates (a measure where higher rates are associated with more aggressiveness), as increasing tax-related litigation risk. Regarding tax uncertainty, premiums increase (decrease) as unrecognized tax benefits (UTB-related settlements with tax authorities) increase. Finally, D&O insurers focus on firms with outbound tax haven activity when pricing tax aggressiveness. Overall, this suggests D&O insurers include aspects of both low taxes and tax uncertainty when pricing tax litigation risk.

Keywords: Tax litigation; Tax risk; Tax aggressiveness; Tax uncertainty; Directors’ and officers’ insurance; D82; G30; H26; K22; K41; M41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11142-021-09612-w

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