Auditor-provided tax services and stock price crash risk

Abstract

This paper examines whether auditor-provided tax services affect stock price crash risk: an important consideration for stock investors. Provision of tax services by incumbent auditors could accentuate or attenuate crash risk depending on whether such services give rise to knowledge spillover or impair auditor independence. The study investigates two channels through which tax services might affect crash risk: earnings management in tax expenses and tax avoidance. Also examined is whether the association between tax services and crash risk is moderated by the particular business strategy that organizations pursue. A two-stage model is used to control for the potential endogeneity inherent in the selection of auditors for tax services. Empirical findings reveal that auditor-provided tax services attenuate crash risk by constraining both earnings management in tax expenses and tax avoidance. Further evidence shows that auditor-provided tax services reduce crash risk for firms following innovator business strategies. Taken together, empirical findings reported in this study support knowledge spillover benefits, that is, insights gained from tax services can enhance audit effectiveness.

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

“…Finally, Habib and Hasan (2016) document a negative relation between APTS fees and stock price crash risk and, further, provide two possible channels through which APTS could affect crash risk.…”

Audit Effort and Stock Price Crash Risk

“…Robin and Zhang (2015) document a negative relationship between auditor industry specialization and crash risk and find that industry‐specialty auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk. Contrary to the concern that tax services dampen auditors’ independence, Habib and Hasan (2016) find that auditor‐provided tax services reduce crash risk by constraining both earnings management in tax expenses and tax avoidance. In line with the ‘spillover knowledge benefits’ addressed by Habib and Hasan (2016), Callen and Fang (2017) suggest a ‘monitoring‐by‐learning’ perspective in their examination of the relationship between auditor tenure and crash risk.…”

“…Contrary to the concern that tax services dampen auditors’ independence, Habib and Hasan (2016) find that auditor‐provided tax services reduce crash risk by constraining both earnings management in tax expenses and tax avoidance. In line with the ‘spillover knowledge benefits’ addressed by Habib and Hasan (2016), Callen and Fang (2017) suggest a ‘monitoring‐by‐learning’ perspective in their examination of the relationship between auditor tenure and crash risk. They argue that auditors experience a learning curve with respect to client‐related knowledge, such that longer auditor tenure enables a better understanding of a client's business and approaches to hoarding bad news.…”

“…Some researchers have found that auditors play a role in constraining crash risk (Robin and Zhang, 2015; Habib and Hasan, 2016; Callen and Fang, 2017; Callen et al ., 2020; Lee, forthcoming). Robin and Zhang (2015) document a negative relationship between auditor industry specialization and crash risk and find that industry‐specialty auditors moderate the effects of opacity, accounting conservatism, and tax avoidance on crash risk.…”

The Effect of KAMs Disclosure in the Extended Audit Report on Managerial Bad News Hoarding Behavior and Stock Price Crash Risk: The Role of Audit Firm Characteristics

“…Jiang and Yi (2013) find that the stock price crash risk reduces when auditors are industry-specialist. Habib and Hasan (2016) show a lessening in non-audit fees is significantly related to the limitation on stock price crash risk. Additionally, Callen and Fang (2017) demonstrate a negative relationship between audit tenure and stock price crash risk.…”