Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit
Jason DeBacker (),
Bradley Heim (),
Anh Tran and
Journal of Law and Economics, 2015, vol. 58, issue 2, 291 - 324
Contrary to common expectations, legal enforcement may increase subsequent corporate misbehavior. Using Internal Revenue Service and financial statement data, we find that corporations gradually increase their tax aggressiveness for a few years following an audit and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and with Bayesian updating of audit risk. This adverse effect on corporate behavior calls for a reexamination of both the theory and policy of legal enforcement.
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlawec:doi:10.1086/684037
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