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Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit

Jason DeBacker (), Bradley Heim (), Anh Tran and Alexander Yuskavage

Journal of Law and Economics, 2015, vol. 58, issue 2, 291 - 324

Abstract: 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.

Date: 2015
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