Tax Avoidance, Tax Aggressiveness, Tax Risk and Firm Risk

In this study we distinguish between the concepts of tax avoidance, tax aggressiveness, and tax risk and examine which, if any, of those concepts is related to overall firm risk. Prior research has argued that aggressive corporate tax avoidance, as measured by low cash effective tax rates or high reserves for unrecognized tax benefits, increases firm risk, thereby requiring firms to provide risk-taking incentives to managers. In this paper we define the concept of tax risk as the ability of a firm to sustain its tax positions over time and test whether tax avoidance, tax aggressiveness, or tax risk are related to future stock return volatility. We find a significantly positive relation between tax risk and firm risk, but do not find evidence of a significant association between either tax avoidance or tax aggressiveness and firm risk.