Preliminary. Please do not quote. AbstractHow prevalent is long-run corporate tax avoidance? Surprisingly, there appears to be no published academic work addressing this basic question. We define tax avoidance based on the ability to sustain a cash effective tax rate (the ratio of cash taxes paid to pretax income) below the statutory tax rate. It is important to note that avoiding taxes does not imply that a firm has done anything improper. There are numerous provisions in the tax code that allow or encourage firms to reduce their taxes. We investigate the extent to which firms are able to engage in corporate tax avoidance over periods as long as ten years. We find that 437 firms, comprising 22 percent of our sample, were able to sustain a cash effective tax rate of less than 20 percent over a ten year period. An initial examination of the characteristics of successful long-run tax avoiders shows that they are spread across industries but cluster somewhat in certain industries such as oil and gas extraction, insurance, and real estate. Other characteristics associated with long-run tax avoidance include having large firm size, being incorporated in a tax haven, having high ratios of property, plant and equipment to assets, being intangible intensive, and being highly levered.

This study investigates whether individual top executives have incremental effects on their firms’ tax avoidance that cannot be explained by characteristics of the firm. To identify executive effects on firms’ effective tax rates, we construct a data set that tracks the movement of 908 executives across firms over time. Results indicate that individual executives play a significant role in determining the level of tax avoidance that firms undertake. The economic magnitude of the executive effects on tax avoidance is large. Moving between the top and bottom quartiles of executives results in approximately an 11 percent swing in GAAP effective tax rates; thus, executive effects appear to be an important determinant in firms’ tax avoidance.

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Religion has been shown to influence economic choices and outcomes in a variety of contexts. Honesty and risk aversion are two social norms forwarded to characterize the religious. Using the level of religious adherence in the county of a US firm's headquarters as a proxy for these religious social norms, we find that higher levels of religious adherence are associated with both a lower likelihood of financial restatement and less risk that financial statements are misrepresented because of overstated (understated) revenue/assets (expenses/liabilities). We also find that accruals of managers in areas of high religious adherence exhibit smaller deviations from expectations, and deviations, when they occur, tend to improve the time series mapping of accruals into cash flows. These results hold overall and separately for both Catholic and Protestant religious adherence. Further analysis reveals that the effects of religious social norms extend beyond accrual choices. We find that firms located in areas of high religious adherence are less likely to engage in tax sheltering, and are more forthcoming with bad news in their voluntary disclosures. Collectively, our results provide new evidence on the role of religion and social norms in corporate financial reporting.