Auditor-provided Tax Services and Stock Price Crash Risk

Ahsan Habib
School of Accountancy
MASSEY UNIVERSITY
PRIVATE BAG 102904
AUCKLAND
NEW ZEALAND
Email: a.habib@massey.ac.nz

Abstract: We examine 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. We investigate two channels though which
tax services might affect crash risk, earnings management in tax expenses; and tax avoidance.
We also examine whether the association between tax services and crash risk is moderated by
different business strategies pursued by organizations. We use a two-stage model to control for
potential endogeneity inherent in the selection of auditors for tax services. Our findings reveal
that auditor-provided tax services attenuate crash risk by constraining earnings management in
tax expenses and tax avoidance. We also find 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, i.e., insights gained from tax services can enhance audit
effectiveness. We provide evidence on the desirability of allowing, further constraining, or
banning auditor-provided tax services.
Keywords: Tax services; stock price crash risk; tax avoidance; tax expense management;
business strategies
JEL Classification: M40, G14, G30.

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1. Introduction
This paper examines empirically the effect of auditor-provided non-audit tax services (NATS) on
stock price crash risk and the mechanisms through which the relationship, if any, manifests itself.
Also examined whether tax service-induced crash risk varies according to different business
strategies pursued by firms. The study is motivated by a long-standing debate in the history of
auditing as to whether external auditors should provide non-audit services (NASs) to clients and
recent regulatory ban on auditors’ providing a variety of NASs excluding the provision of
NATS.
There are competing arguments regarding the implications of NASs for audit quality.
Opponents of NASs argue that auditor independence and consequently audit quality is impaired
when auditors also provide NASs. This idea was formally developed by DeAngelo (1981) who
relates auditor independence with client-specific future quasi rents defined as “...the excess of
revenues over avoidable costs, including the opportunity cost of auditing the next-best
alternative client” (italics in original) (p.116). She develops a two-dimensional definition of
audit quality that sets the standard for addressing auditor independence issue. An auditor will be
considered independent if he/she can detect a material misstatement and then report it to the
audit service consumers. If no client-specific quasi-rents are expected from a given client
relationship then the auditor should have no economic incentive to conceal financial
misstatements and therefore should be considered perfectly independent from the client.
However, if the client-specific future quasi rents are high then auditors may compromise
independence to retain such quasi rents. It has been argued that NAS provides more quasi rents
than do audit services because of the higher margin derived from the former and therefore is
more likely to impair auditor independence [SEC, 2000], particularly independence in
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appearance (Lindberg and Beck, 2004). Proponents of auditor-provided NASs, however, argue
that, NASs provide considerable economies of scope. These economies of scope are broadly
categorized into knowledge spillover benefits (benefits from transferring information and
knowledge), and contractual economies (making better use of assets and/or safeguards already
developed when contracting and ensuring quality in auditing) (Simunic, 1984; Beck, Frecka and
Solomon, 1988; Arrunada, 1999).
Regulatory response to NASs, at least in the USA, takes side on the impairment of
auditor independence argument. This response can be attributed to independence concern for big
audit firm’s arising from the provision of NASs to existing clients which, among other factors,
has been identified to one of the reason for massive corporate collapses experienced by US
economy in the beginning of this century. Congress ratified the Sarbanes-Oxley Act (SOX) in
2002; Section 201 prohibits auditors from providing a variety of NASs for their audit clients.
However, the SEC determined that it would not prohibit auditor-provided NATS, a specific type
of NAS that auditors frequently provide to their audit clients. However significant restrictions
have been imposed on the provision of such services. In particular, (a) all auditor-provided
NATS are to be specifically preapproved by the client’s audit committee; (b) fees paid to
auditors for NATS are to be identified separately in the company’s annual proxy statements; (c)
the auditor cannot audit his own work, the auditor cannot function as a part of management, and
the auditor cannot serve in an advocacy role for the audit client; and (d) SOX violations are
subject to expanded criminal and civil liabilities and penalties.
To address regulatory concerns, recent empirical studies have examined the relation
between auditor-provided NATS and earnings management and finds support for knowledge
spillover benefits from auditor-provided NATS outweighing independence impairment concern.

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For example, auditor-provided NATS reduce incidence of financial restatements (Kinney,
Palmrose, and Scholz, 2004) as well as tax-related restatements (Seetharaman, Sun, and Wang,
2011). Paterson and Valencia (2011) confirm Kinney et al. (2004) result but only for recurring
NATS. Nonrecurring tax engagements, on the other hand, increases the probability of future
restatements (a threat to auditor independence). Also consistent with knowledge spillover
argument, Omer, Bedard, and Falsetta (2006) and Krishnan and Visvanathan (2011) find a
negative association between auditor-provided NATS and discretionary accruals. Gleason and
Mills (2011) find that companies purchasing tax services from their auditors do not manage tax
reserves to meet/beat analyst forecasts more than other companies.
These studies, however, did not examine a more extreme form of adverse outcome
having direct economic consequences for investors, stock price crash risk. Stock price crash risk
at the firm level refers to the likelihood of observing extreme negative values in the distribution
of firm-specific returns after adjusting for the return portions that co-moves with common factors
(Jin and Myers, 2006; Kim et al., 2011a; 2011b). Conceptually, stock price crash risk is premised
on the notion that managers have a tendency to withhold bad news for an extended period of
time, allowing bad news to stockpile. When the accumulation of bad news passes a threshold, it
is revealed to the market at once, leading to a large negative drop in price for the stock (Jin and
Myers, 2006). Crash risk is an important characteristic of return distribution that is relevant to
portfolio theories, asset-pricing, and option-pricing models. Sunder (2010) argues that crash risk
is undervisiable, unlike the risk from symmetric volatilities. Harvey and Siddique (2000) suggest
that conditional skewness (one proxy for crash risk) is a priced factor.1 Because investors are

1

Crash risk, a third moment of stock returns capturing negative skewness, is distinct from other measures
studied in prior research, such as the average return (first moments), and the variance of stock returns (the
second moments). Several studies (e.g., Gabaix 2012; Kelly and Jiang, 2014) have theoretically hypothesized
and empirically documented that crash risk increases the required return of investors. Conrad et al. (2013) find

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averse to stocks with greater crash risk because of the undiversifiable nature of those stocks,
determining whether auditor-provided NATS mitigate (exacerbate) crash risk by deterring
(aiding) managerial bad news hoarding behavior, would help investors better allocate their
resources.
In a recent empirical study, Kim, Li, and Zhang (2011) document a positive association
between corporate tax avoidance and future crash risk. They argue that “ Tax avoidance
activities can create opportunities for managers to pursue activities that are designed to hide bad
news and mislead investors…Perhaps more importantly, managers are able to justify the opacity
of tax avoidance transactions by claiming that complexity and obfuscation are necessary to
minimize the risk of tax avoidance arrangements being detected by the [taxing authorities]… To
some extent, these avoidance activities are shielded from the investigations of audit committees
and external auditors” (p. 640, italics added). Although Kim et al. (2011) considers external
auditors’ monitoring with respect to clients’ tax avoidance to be lacking, we argue that strength
of the relationship between tax avoidance and crash risk depends on auditor-provided NATS.
However, competing arguments exist as to whether auditor-provided NATS impairs
auditor independence or generates spillover financial reporting quality benefits; i.e., insight
learned from providing tax services can enhance audit effectiveness and, client’s financial
reporting quality. In the former case external auditors could assist its clients devising complex
tax avoidance strategies, thereby increasing the probability of future crash risk. In the latter case,
however, the knowledge spillover created by auditor-provided NATS can enhance overall audit

that more negatively skewed returns generate subsequent higher returns, a compensation for greater crash risk.
From an asset pricing perspective, Chang et al. (2013) find that negative skewness in market returns is
associated with a positive risk premium. Also, Huang et al. (2012) find that stocks with extreme downside risk
have higher expected returns after controlling for market, size, value, momentum, and liquidity effects.

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effectiveness via better communication between the audit and tax sides, thus mitigating auditor
information asymmetry (Krishnan et al., 2013). Considered from this perspective, future crash
risk is likely to be lower for firms with incumbent auditors providing NATS. We test these
competing arguments by including two channels, namely, tax expense-based earnings
management and tax avoidance, through which the association between auditor-provided NATS
and crash risk could be more meaningfully tested.2
We use a two-stage model to control for potential endogeneity associated with the
selection of the auditor for tax services. Our first-stage model includes determinants of auditorprovided NATS identified in prior research (McGuire et al. 2012). We then examine the impact
of auditor-provided NATS on future crash risk and whether tax expense earnings management
and tax avoidance moderates the relationship. We use earnings management in tax expenses as
opposed to commonly used discretionary accruals as our earnings management proxy. Using
negative conditional skewness (NCSKEW) and down-up volaitility (DUVOL) as our crash risk
measures, we find that auditor-provided NATS mitigates future crash risk by reducing earnings
management in tax expenses, and deterring tax avoidance behavior. We, therefore, provide
empirical support for the knowledge spillover benefits emanating from the provision of NATS.
We also find that, auditor-provided NATS constrain tax avoidance and hence reduces the
probability of crash risk for firms following innovator business strategies, a finding that has not

2

Zang, Goh, Lim, and Shevlin (2013) find that auditors are more likely to resign from firms with aggressive
tax strategies (high tax avoidance). Relevant to our study, they also document a weaker effect of tax
aggressiveness of auditor resignation if incumbent auditors provide tax services. They interpret this finding as
NATS impairing auditor independence. However, an alternative interpretation may suggest that knowledge
spillover benefits from tax services allow incumbent auditors to be more efficient in auditing financial and tax
accounting, reducing the chance of reporting irregularities which reduce auditors’ exposure to costly litigation.
This line of reasoning supports provision of tax services lowering the chance of auditor resignation.

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been documented before. We consider strategy-tax avoidance link as Higgins, Omer, and Philip
(2013) show that innovators engage more in tax avoidance than their defender counterparts.
We contribute to the literature in a number of ways. First, we provide evidence on the
desirability of allowing, further constraining, or banning auditor-provided NATS (PCAOB
2004). We do that by evaluating the extent to which provision of tax services increase or
decrease crash risk, a more acute form of outcomes having direct economic consequences for
investors. Unlike other studies that directly examine the effect of auditor-provided NATS on
earnings quality, we consider the joint effect of NATS and earnings quality on crash risk.
Second, we extend the growing literature on the determents of crash risk by investigating the
effect of external auditors, an essential governance mechanism, on crash risk. Since external
auditors are directly responsible for verifying the authenticity of tax-related transactions reported
in financial statements, it is logical to assume a dominant role played by auditors. One exception
is Robin and Zhang (forthcoming) who find that industry specialist auditors reduce future crash
risk arguing that industry specialist auditors have the expertise to reduce managerial propensity
to hoard bad news. Our study differs from Robin and Zhang because of our focus on auditorprovided NATS and the effect tax expense-related earnings management moderating the
relationship between NATS and future crash risk. Finally, we contribute to the interface of
strategy and crash risk research. An understanding of the effect of business strategies on crash
risk and whether auditor-provided NATS strengthens the relationship, would assist investors in
carefully allocating resources among companies with different business strategies.
The remainder of the paper proceeds as follows. Section 2 reviews related literature and
develops testable hypotheses. Section 3 explains research design issues. The following section

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provides sample selection procedure and descriptive statistics. Main test results are reported in
section 5. Final section concludes the paper.

2. Review of related literature and development of hypotheses
Auditor-provided NASs has and still remains a matter of serious regulatory and investor concern.
While all fees create economic bonds between the auditor and client, debate has typically alleged
that the provision of NAS provides incentives for audit firms to accept clients’ questionable
accounting choices, thus reducing auditor independence and ultimately the quality of financial
reporting. The provision of NAS has been the focus of most recent attention, presumably
reflecting the widely accepted view that NAS typically is provided at a higher profit margin than
audit services (Ruddock and Taylor, 2005). Such concerns prompted the SEC to prohibit most
types of NASs in Section 201 of the SOX-2002 act. However, SEC allowed auditor-provided
NATS subject to the pre-approval by the audit committees.3
Auditors evaluate the validity of accrued taxes payable and tax contingent liabilities on
the balance sheet, income tax expense on the income statement, and the related note disclosures
to provide adequate assurance to the investing public about the appropriateness of these items
and disclosure (Barrett 2004). Although many accruals facilitate earnings management,
managers can use valuation allowances (Frank and Rego 2006), tax contingency reserves (Gupta,
Laux, and Lynch 2011), estimates of accrued taxes (Dhaliwal et al. 2004), and the designation of
permanently reinvested earnings (Krull 2004) to achieve earnings targets. Because any material
information about risky tax transactions tends to be hidden in these accounts and disclosure,
3

For a representative list of NATS that were routinely provided by auditing firms to their audit clients but are
either banned by SOX, no longer offered by some auditing firms to their clients, or are unlikely to be
preapproved by audit committees, see Appendix B in Seetharaman et al. (2013).

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auditors also have to assess whether their clients engage in potentially abusive tax transactions.
Whether auditor-provided NATS help auditors discover these risky tax transactions (knowledge
spillover) or impair independence by aiding clients develop abusive taxation strategies
(impairment of independence) has become an issue of immense importance for regulators and
investor community alike.
In a study of restatements involving GAAP violations, Kinney et al. (2004) find a
negative association between restatements of financial statements and tax services but
Seetharaman et al. (2009) fail to find any such evidence. However, they find a significant
negative association between auditor-provided tax services and tax-related restatements,
consistent with knowledge spillover. Further evidence in support of knowledge-spillover benefits
from NATS has been documented for auditors’ propensity to issue going-concern opinions
(Robinson, 2008); adequate tax reserves being maintained by firms procuring tax services from
incumbent auditors (Gleason and Mills, 2010); lower debt pricing costs for clients procuring tax
service from the same auditor (Fortin and Pitman, 2008); and lower earnings management in tax
expenses for firms with auditor providing NATS (Lisic, 2014). Krishnan and Visvanathn (2011)
also find support for auditor-provided tax services constraining earnings management but their
proxy for earnings management is loss avoidance which fails to capture the tax-related earnings
management practices. In a follow-up study Krishnan, Visvanathn, and Yu (2013) find that
earnings are more value-relevant for firms where incumbent auditors provide tax services.
However, their study does not investigate the possible channels that strengthens or weakens this
relationship (e.g., information quality, external monitoring and so on).
Evidence in support of auditor-provided NATS threatening auditor independence has
been documented by Cook et al. (2008). They find that incumbent auditors who also provide tax

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services help clients to reduce 4th quarter ETR, thereby, increasing earnings management. Harris
and Zhou (2013) find that auditor-provided NATS reduces non-tax internal control weaknesses
but not tax-related internal control weaknesses.
Since the decision to use incumbent auditor for tax services is endogenously determined,
some studies examine the rationale for procuring tax services from incumbent auditors. Albring
et al. (2009) find that corporate governance attributes, such as board independence, the audit
committee’s accounting expertise, and separation of the CEO and the chairman of the board, play
a role in a firm’s decision to switch to a nonauditor provider for tax services. Similar to Albring
et al. (2009), Lassila et al. (2010) provide evidence that firms with strong corporate governance
and relatively high levels of tax and operational complexity are more likely to retain their auditor
for tax services.
In a recent empirical work Kim et al. (2011) find convincing evidence that tax avoidance
increases future stock price crash risk. Conceptually, stock price crash risk is premised on the
notion that managers have a tendency to withhold bad news for an extended period of time,
allowing bad news to stockpile. When the accumulation of bad news passes a threshold, it is
revealed to the market at once, leading to a large negative drop in price for the stock (Jin and
Myers, 2006). Kim et al. (2011) argue that aggressive tax strategies and planning provides
managers with a means to conceal negative information that increases crash risk.
Kim et al. (2011), however, did not investigate whether auditor-provided NATS aid or
deter tax-related earnings management as well as tax avoidance behavior. Therefore external
auditors’ involvement in the tax avoidance-crash risk link remains unexplored. Instead Kim et al.
(2011a) considered strength of external monitoring proxied by analyst coverage and institutional
shareholdings as potential mechanisms for reducing crash risk. We fill this void by arguing that

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incumbent auditors providing tax services are better able to differentiate between valueenhancing versus value-destroying tax planning stratgeies. Firms that engage in tax
aggressiveness have a higher chance of misstatements and restatements because managers can
use various accounts such as valuation allowances, tax contingency reserves, and estimates of
accrued taxes to manipulate earnings (e.g., Hanlon and Heitzman 2010; Frank and Rego 2006;
Gupta et al 2011; Dhaliwal et al. 2004). Aggressive tax positions involve complex and risky
techniques, which require additional research, specialized audit procedures, documentation, and
consultations with tax professionals to audit (Donohoe and Knechel 2013).4
Audit firms providing tax services to their clients would package not only their
reputation, or technical expertise in the provision of such services but would also make the most
of their unique ability as auditors to leverage these benefits into higher financial reporting quality
(Seetharaman et al., 2013). .Insights gained from performing tax services will enable auditors to
be more intimate about clients’ strategic decisions regarding tax planning which benefits the
auditors in uncovering tax expense-related earnings management and tax avoidance policies.
That familiarity facilitates management’s consideration of the financial reporting implications of
various alternatives, resulting in more certainty in terms of the financial reporting aspects of the
company’s tax positions and deterring clients’ opportunities for using complex transactions for
obfuscating financial reporting opaqueness. Since financial reporting opaqueness has been

4

For example, complex tax shelters created by Enron allowed managers to manipulate earnings while
preventing investors from understanding the sources (Desai and Dharmapala 2009). The tax avoidance
activities arranged by Tyco facilitated the centralization of power by management and enabled them to obscure
their rent diversion through means such as unauthorized compensation, abuse of corporate funds for personal
uses, and insider trading (Desai 2005). In line with this view, studies document that aggressive tax reporting
leads to lower earnings quality, a higher likelihood of managerial fraud, and higher stock price crash risk (e.g.,
Badertscher et al. 2009; Ettredge et al. 2008; Frank et al. 2009; Hanlon 2005; Kim et al. 2011). (Zang et al.,
2013).

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identified to be an important determinant crash risk, the above argument on knowledge spillover
suggests a negative relationship between auditor-provided NATS and crash risk.
However, competing argument exists. Auditor-provided NATS could threaten auditor
independence by increasing auditor’s economic dependence on the clients. This has become
more of a concern after SEC’s simultaneous prohibition on other NASs. Seetharaman et la.
(2013) conjecture that this may have the unintended consequences of shifting the source of
independence problems from other categories of NASs to NATS. Suck lack of independence will
reduce the incentives for incumbent auditors to detect and report tax-related earnings
manipulation, with the resulting consequence of a greater probability of future crash risk. Our
first hypothesis on the association between NATS and future crash risk is as follows: :
H1: Auditor-provided NATS is associated with tax-related earnings management and clients’ tax
avoidance and affects future crash risk.

Our second hypothesis is built on the premise that there is an association between firmlevel business strategies, corporate tax avoidance, and subsequent crash risk. We argue that these
firm-level determinants of crash risk are determined, to a large extent, by unique business
strategies pursued by individual firms. For example, firms following aggressive business
strategies may have to engage more in earnings manipulation to sustain overly optimistic
expectations by investors about the future performance of these firms (.
Miles and Snow (1978, 2003) detail three viable business strategies that may exist
simultaneously within industries—Prospectors, Defenders, and Analyzers— because of
differences in the magnitude and direction of change regarding its products and markets
(Hambrick 1983). These strategies are positioned along a continuum, with prospectors at one end

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and defenders at the other. Prospectors rapidly change their product market mix to be innovative
market leaders, while defenders focus more on a narrow and stable product base to compete on
the basis of price, service, or quality. Firms that constitute the middle of the continuum are
analyzers possessing the attributes of both prospectors and defenders (Miles and Snow 1978,
2003). Prior research on organization theory has demonstrated that prospectors have a higher
level of outcome uncertainty, plagued with more information asymmetry, and structure executive
compensation that is primarily long-term and incentive-based. Following this Higgins et al.
(2013) document an increasing propensity for innovators to engage in more tax avoidance
compared to their defender counterparts. This finding is explained by the fact that firm strategies
are, in part, based on firms’ willingness to deal with risk and uncertainty with prospectors being
subject to more uncertainty and hence requiring more tax planning. Habib and Hasan (2014)
provide empirical evidence that prospectors are more prone to crash. This two streams of
literature therefore suggests that tax avoidance propensities of prospectors may contribute to
future crash risk. Auditor-provided NATS may strengthen (weaken) this relationship depending
on whether independence impairment or knowledge spillover argument dominates. Our second
hypothesis is as follows:

H2: There is an association between Auditor-provided NATS and future crash risk for firms
pursuing different innovator business strategies.

3. Research design and sample selection
3.1 Stock price crash risk

In this study two measures of firm-specific crash risk are used, consistent with Chen et al.
(2001). Both measures are based on firm-specific weekly returns estimated as the residuals from
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the market model. This ensures that our crash risk measures reflect firm-specific factors rather
than broad market movements. Specifically, we estimate the following expanded market model
regression:

rj ,   j  1 , j rm, 2   2 , j rm, 1  3 , j rm,   4 , j rm, 1  5 , j rm, 2   j , .......(1)
Where r,j,τ is the return of firm j in week τ, and rm,τ is the return on CRSP value-weighted market
return in week τ. The lead and lag terms for the market index return is included to allow for
nonsynchronous trading (Dimson, 1979). The firm-specific weekly return for firm j in week τ (W
j,τ)

is calculated as the natural logarithm of one plus the residual return from Eq. (1) above. In

estimating equation (1), each firm-year is required to have at least 26 weekly stock returns. Our
first measure of crash risk is the negative conditional skewness of firm-specific weekly returns
over the fiscal year (NCSKEW). NCSKEW is calculated by taking the negative of the third
moment of firm-specific weekly returns for each year and normalizing it by the standard
deviation of firm-specific weekly returns raised to the third power. Specifically, for each firm j in
year τ, NCSKEW is calculated as:

NCSKEW=  n(n  1)3 / 2  w3 j ,

/(n  1)(n  2)( w

2

j ,

)3 / 2 ……..(2)

Our second measure of crash risk is the down-to-up volatility measure (DUVOL) of the crash
likelihood. For each firm j over a fiscal-year period τ, firm-specific weekly returns are separated
into two groups: ‘‘down’’ weeks when the returns are below the annual mean, and ‘‘up’’ weeks
when the returns are above the annual mean. Standard deviation of firm-specific weekly returns
is calculated separately for each of these two groups. DUVOL is the natural logarithm of the ratio
of the standard deviation in the ‘‘down’’ weeks to the standard deviation in the ‘‘up’’ weeks:

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DUVOL j ,  log(nu  1)  w2 j , /(nd  1) w2 j ,
Down

……………….(3)

Up

A higher value of DUVOL indicates greater crash risk. As suggested in Chen et al. (2001),
DUVOL does not involve third moments, and hence is less likely to be overly influenced by
extreme weekly returns.

3.2 Earnings management

Earnings management for this study is proxied by earnings management in tax expense
following Dhaliwal et al. (2004). Specifically, we compare changes in 4th quarter ETR from 3rd
quarter ETR to discern the presence of earnings management. A more negative difference
implies higher earnings management in tax expenses. ETR is defined as accumulated tax
expense (Compustat quarterly #6) divided by accumulated pre-tax income (quarterly #23). We
believe ETR-based earnings management proxy is more relevant for our study as we are
interested in auditors’ monitoring role over tax-based earnings management practices. We
include discretionary accruals as an additional control variables in our model to address omitted
variables problem.

3.3 Business strategy composite measure

Our compiste strategy scores is derived from Bentley et al. (2013). A higher (lower) score
represents companies with prospector (defender) strategies. Bentley et al. (2013) constructed
their index using a wide variety of firms characteristics intended to capture the differences in the
magnitude and direction of change regarding its products and markets (Hambrick 1983).
Characteristics included are: (a) the ratio of R&D to sales (measure of a firm’s propensity to seek
new products); (b) the ratio of employees to sales (firm’s ability to produce and distribute its
15 | P a g e

goods and services efficiently); (c) a measure of employee fluctuations (standard deviation of
total employees); (d) a historical growth measure (one-year percentage change in total sales)
(proxy for a firm’s historical growth); (e) the ratio of marketing (SG&A) to sales (a proxy for
firms’ emphasis on marketing and sales); and (f) a measure of capital intensity (net PPE scaled
by total assets) (designed to capture a firms’ focus on production).
All variables are computed using a rolling average over the prior five years. Each of the
six individual variables is ranked by forming quintiles within each two-digit SIC industry-year.
Within each company-year, those observations with variables in the highest quintile are given a
score of 5, in the second-highest quintile are given a score of 4, and so on, and those
observations with variables in the lowest quintile are given a score of 1. Then for each companyyear, the scores across the six variables are summed such that a company could receive a
maximum score of 30 (prospector-type) and a minimum score of 6 (defender-type).5

3.4 Empirical model
Before formally developing empirical models for testing our hypotheses we estimate firm’s
decision to procure tax services from incumbent auditors because of the endogenous nature of
tax service acquisition decision. Prior research finds that the decision to use the incumbent
auditor for tax services is driven by several factors (Omer et al. 2006; Lassila et al. 2010;
McGuire et al. 2012). To control for the influence of the observable and unobservable
determinants associated with the decision to hire the auditor for tax services, we use a two-stage
model (Heckman 1979). Our first-stage model includes likely determinants of the decision to

5

See Appendix 2 in Bentley et al. (2013) for a detailed discussion on the estimation of the STRATEGY score.
The scoring for capital intensity measure is inverted because defenders are expected to have the highest capital
intensity.

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acquire tax services from incumbent auditors following McGuire et al. (2012). We estimate the
following probit model (firm and year subscripts are not reported):
ATSD   0  1MERGER   2 AUDIND   3 LAF   4 SIZE   5 DAC   6 NOL 
 7 EQINC   8 FI   9 R & D  10 LEV  11BTM  12 PPE  13ROA  14CASH 
15 BIG 4  16SECTIER   .....................................(4)

Where ATSD is an indicator variable set equal to 1 if the firm purchased tax services from their
incumbent auditors, and 0 otherwise; MERGER is an indicator variable set equal to 1 if the firm
participated in any merger activity during the year, and 0 otherwise; AUDIND is auditor
independence from the client, measured as nonaudit fees less tax fees divided by total audit fees
received from the client; LAF is natural log of audit fees received from the client; SIZE is natural
log of market value of equity; |DAC| is the absolute value of Modified Jones (1995) discretionary
accruals; NOL is an indicator variable set equal to 1 if there is a tax loss carryforward during
year t, and 0 otherwise; EQINC is equity income for year t scaled by total assets at the beginning
of the year; FI is pre-tax foreign income for year t scaled by total assets at the beginning of the
year; R&D is R&D expense for year t scaled by total assets at the beginning of the year; LEV is
long-term debt for year t scaled by total assets at the beginning of the year; BTM is book-tomarket ratio for the end of year t, measured as book value of equity divided by market value of
equity; PPE is net PPE for year t scaled by total assets at the beginning of the year; ROA is
return on assets for year t, measured as the ratio of income before extraordinary items to the
average of total assets for the year; CASH is cash holding at the end of year t divided by total
assets at the beginning of the year; BIG4 is an indicator variable set equal to 1 if the firm is
audited by one of the Big 4 auditors, and 0 otherwise; and SECTIER is an indicator variable set
equal to 1 if the firm is audited by a second-tier accounting firm; namely, Grant Thornton LLP
and BDO Seidman LLP, and 0 otherwise. Consistent with prior research, positive coefficients are
17 | P a g e

expected on

MERGER, LAF, SIZE, NOL, FI, LEV, PPE, ROA, and BIG4, and negative

coefficients on AUDIND, |DAC|, EQINC, R&D, BTM, CASH, and SECTIER. We estimate IMR
from first-stage model and use this as an additional independent variable in the subsequent
regressions to address endogeneity.
To investigate the association between auditor-provided NATS and future crash risk we
develop the following regression model.
CRASH i ,t   0  1CRASH t 1   2TAX t 1   3 ETRt 1   4TAX * ETRt 1   5 ETR3t 1 
 6TURNt 1   7 RETt 1   8 SDRETt 1   9 SIZEt 1  10MTBt 1  11LEVt 1 
12 | DACt 1 |  13ROAt 1  14 BIG 4t 1  15 IMR   ........................................(5)

Where CRASH risk is proxied by NCSKEW and DUVOL measures following equations (2) and
(3) above. The independent variables are calculated using data from the preceding year
consistent with crash risk literature. We first control for the lag value of CRASH_RISK to
account for the potential serial correlation of NCSKEW or DUVOL for the sample firms. TAX is
dollar value of tax services in thousand. The coefficient on TAX could either be positive or
negative with respect to crash risk depending on whether auditor-provided NATS threatens
auditor independence or generates financial reporting quality spillover benefits. ∆ETR is change
in ETR from 3rd quarter to 4th quarter and is our proxy for earnings management in tax expenses.
We expect the coefficient to be negative.

Our variable of primary interest is TAX*∆ETR

capturing the effect of NATS-induced earnings management and its effect on future crash risk.
We expect the coefficient to be negative (positive) if knowledge spillover (impairment of
independence) argument dominates. ETR3 is included in the model to control for possible mean
reversion in ETR (Lisic, 2014).

18 | P a g e

Inclusion of the control variables follow prior literature on the determinants of crash risk.
TURNt-1 is the average monthly share turnover over the current fiscal year minus the average
monthly share turnover over the previous fiscal year, where monthly share turnover is calculated
as the monthly trading volume divided by the total number of shares outstanding during the
month. Chen et al. (2001) indicate that this variable is used to measure differences of opinion
among shareholders and it is significantly, positively related to crash risk proxies. Chen et al.
(2001) show that negative skewness is larger in stocks that have had positive stock returns over
the prior 36 months. To control for this possibility, we include past one-year weekly returns (
RETt-1). SDRET t-1 is the standard deviation of firm-specific weekly returns over the fiscal year
denoting stock volatility as more volatile stocks are likely to be more crash prone. Chen et al.
(2001) also demonstrate that negative return skewness is higher for larger firms. To control for
the size effect, we add SIZEt-1 measured as the natural log of total assets. The variable MTBt-1 is
the market value of equity divided by the book value of equity. Both Chen et al. (2001) and
Hutton et al. (2009) show that growth stocks are more prone to future crash risk. LEVERAGEt-1
is the total long-term debt divided by total assets, which is shown to be negatively associated
with future crash risk (Kim et al. 2011a, b). DAC

t-1

is the absolute discretionary accruals

calculated using the Modified Jones model (1995) and should be positively associated with crash
risk (Hutton et al., 2009). ROA is included in the model to control for profitability effect on
crash risk. Finally, we include BIG 4 in the regression equation to control for the differential
audit quality which might have implications for managerial propensity to withhold bad news, the
underlying determinant of crash risk.

19 | P a g e

H1 also predicts that auditor-provided NATS will affect future crash risk by deterring or
aiding clients’ abusive tax avoidance practices. The following regression specification is
developed to test this proposition.
CRASH i ,t   0   1CRASH t 1   2TAX t 1   3 AVOIDt 1   4TAX * AVOIDt 1   5TURNt 1 
 6 RETt 1   7 SDRETt 1   8 SIZEt 1   9 MTBt 1   10 LEVt 1   11 | DACt 1 | 
 12 ROAt 1   13BIG 4t 1   14 IMR   .......................................(6)

We use three proxies to operationalize tax avoidance behavior. Lisowsky, Robinson, and
Schmidt (2012) suggest that the probability of engaging in tax sheltering, discretionary
permanent book-tax difference, permanent book-tax difference, book-tax difference, and cash
effective tax rates capture the varying degree of tax aggressiveness, from most aggressive to least
aggressive. We consider tax sheltering and permanent book-tax differences as the two most
aggressive form of tax avoidance and also use ETR as the least aggressive form of tax avoidance.
We first use the tax shelter prediction score developed by Wilson (2009) as follows:

SHELTER = -4.86 + 5.20 * BTD + 4.08 * DAC - 1.41 * LEV + 0.76* SIZE + 3.51 * ROA + 1.72
* FI + 2.43 * R&D…………………………………(7)
where BTD is book income less taxable income scaled by lagged total assets, DAC is the
discretionary accruals from the performance-adjusted modified cross-sectional Jones Model,
LEV is long-term debt divided by total assets; SIZE is the log of total assets, ROA is pre-tax
earnings divided by total assets, FI is foreign pre-tax earnings divided by lagged total assets,
R&D is research and development expenditure divided by lagged total assets. Higher score
implies more sheltering and hence more tax avoidance. This proxy of tax sheltering captures a
more complicated form of sheltering that allows managers to conceal bad news and increasing
the probability of crash risk in the future (Kim et al., 2011).

20 | P a g e

Our second tax avoidance proxy, which is also considered to be relatively aggressive, is
discretionary permanent book-tax differences (DTAX), a subset of BTD [(BTD reduces the firm‟s
tax liability while increasing after-tax reported financial income (Shevlin 2002)]. Following
Frank et al. (2009) we first compute permanent book-to-tax difference (PERMDIFF) as total
book-tax differences (BTD) less temporary book-tax differences (TXDI/STR). DTAX is defined as
the residuals from the regression of permanent differences on several determinants of
nondiscretionary permanent differences unrelated to tax planning, estimated by year and two
digit SIC code, with at least 20 firms in each industry:
PERMDIFF = α0 + α1(1/ATLAG) + α2INTANG + α3UNCON + α4MI + α5CSTE + α6ΔNOL
+α7LAGPERM + ε )……………………..(8)

ATLAG refers to lagged total assets (AT), INTANG refers to goodwill and other
intangibles (INTAN), UNCON refers to income/loss reported under the equity method (ESUB),
MI refers to income/loss attributable to minority interest (MII), CSTE refers to current state tax
expense (TXS), ΔNOL refers to the change in net operating loss carry forwards (TLCF) and
LAGPERM is the lagged PERMDIFF. All variables are scaled by lagged total assets.
Our third measure of tax avoidance is proxied by firm’s effective tax rates (ETR)
calculated as the ratio of total tax expense divided by Pre-tax income. The lower the ETR, the
higher the tax avoidance propensity. Of the three tax avoidance proxies used, ETR is considered
to be least aggressive and therefore less likely to capture the effect of more egregious tax
avoidance on crash risk. The coefficient on the interaction variable TAX*AVOID will indicate
whether auditor-provided NATS creates spillover benefits mitigating future crash risk or
threatens auditor independence and hence accentuates future crash risk. In the former (latter)
case the coefficient on the interaction variable should be negative (positive).
21 | P a g e

Finally we test tax provision by incumbent auditors on crash risk for firms following
different business strategies. The following regression equation is developed.
CRASH i ,t   0   1CRASH t 1   2TAX t 1   3 STRATEGYt 1   4 AVOIDt 1   5TAX * AVOIDt 1
 6TAX * STRATEGYt 1   7 STRATEGY * AVOIDt 1   8TAX * STRATEGY * AVOIDt 1
 9TURNt 1   10 RETt 1   11SDRETt 1   12SIZEt 1   13MTBt 1   14 LEVt 1 
 15 | DACt 1 |  16 ROAt 1   17 BIG 4t 1   18 IMR   .......................................(9)

where, STRATEGY is categorised into prospector/innovator strategies (PROSPECT) and
defender (DEFEND) strategies. Details about STRATEGY score composition is explained in 3.3
above. All other variables are defined as before. Higgins et al. (2013) document an increasing
propensity for innovators to engage in more tax avoidance compared to their defender
counterparts. Habib and Hasan (2014) provide empirical evidence that prospectors are more
prone to crash. If auditor-provided NATS mitigate future crash risk then iot should be more
pronounced for innovators willing to engage in more tax avoidance. We, therefore, expect a
negative coefficient on the three-way interaction variable TAX*STRATEGY*AVOID if
knowledge spillover benefits dominated.
To control for unobservable industry and year characteristics associated with firm tax
service provision and crash risk, we include year and industry dummy variables in all our
regression specifications. To take into account the time series and cross-sectional dependence in
the error terms of our regressions, we calculate t-statistics using standard errors that are clustered
by both firm and year (Petersen 2009).

4. Sample selection and descriptive statistics
Our sample selection procedure begins with identifying auditor-provided tax services and
relevant audit-related data from Audit Analytics which was 163,266 from 2000-2012 sample
22 | P a g e

period. We then excluded firm-year observations from the regulated industries (two digit SIC 49)
and financial institutions (two-digit codes 60-69). This eliminates a total of 55,720 firm-year
observations. We further eliminated 15,879 non-US firm-year observations yielding a US sample
with required audit data of 88,897 firm-year observations. We then matched CIK codes from
COMPUSTAT with Audit Analytics CIK codes and found a matched sample of 45,573 firm-year
observations. Not all of these observations had the requisite crash risk measures and related
control variables further reducing the sample to 21,950 firm-year observations. Our sample size
further reduces for tax avoidance analysis because of missing data on tax avoidance.
Panel A in Table 1 provides descriptive statistics for the variables used in the regression
analyses. The mean values of the crash risk measures, NCSKEW and DUVOL, are -0.07 and 0.37 respectively. About 67% of the firm-year observations procure tax services from their
incumbent auditors. In terms of dollar values, average firms pay about $303,000 in tax fees
although there is substantial variation among companies as is evident from a high standard
deviation. Average tax avoidance measures are 0.42, 0.02, and 0.28 for SHELTER, DTAX, and
ETR measures respectively. Average STRATEGY score is 16.91 on a scale of 6 to 30 with
prospectors and defenders constituting 5% and 11% of the sample observations respectively.
Seventy seven percent of the firm-year observations are audited by Big 4 audit firms. Firm year
observations come from a wide varieties of industries with two digit SIC codes 35-39 and 70-79
commanding the largest industry representation in our sample. Panel C in Table 1 presents
correlation analysis. The correlation between NATS and two measures of crash risk are positively
correlated with DUVOL revealing a much higher correlation of 0.08 than the 0.02 reported by
NCSKEW measure. Both crash risk proxies as well as NATS are significantly positively related
to firm size.

23 | P a g e

[TABLE 1 ABOUT HERE]

5. Multivariate regression results
We begin our multivariate analysis by modeling the determinants of firms’ decision to procure
tax services from their incumbent auditors to alleviate the endogeneity concern since the choice
of incumbent auditors over other providers is not a random selection. Regression specification
(4) is a probit model whereby auditor-provided NATS is regressed on a set of variables likely to
determine firm’s decision to engage incumbent auditor as the tax service provider (McGuire et
al., 2012). The model includes a number audit-related variables, e.g., BIG4 and second tier
auditor indicator, audit fees, and a variable capturing auditor independence from client. Also
included are financial variables likely to explain firm’s decision to choose incumbent auditors as
NATS provider. We find that larger firms, firms audited by Big 4, firms paying higher audit fees,
and firms with more foreign income are more likely to procure NATS from incumbent auditors
compared to firms audited by second tier audit firms, and firms with more equity income. We
computed IMR from this regression model and used it as an additional independent variable in
all the subsequent regressions to address self-selection concern.

[TABLE 2 ABOUT HERE]

Table 3 reports results for H1 which investigates the association between auditor-provided
NATS and future crash risk (Models 1& 2) and whether tax expense earnings management
(change in ETR from 3rd to 4th quarter) acts as a conduit through which NATS accentuates or
attenuates future crash risk (Models 3 & 4). Baseline regression model reveals that NATS

24 | P a g e

proxied by dollar amount of tax service costs is negatively related to future crash risk for both
the crash risk measures (coefficients of -0.000017 and -0.000014 for NCSKEW and DUVOL
respectively). The negative and significant coefficients suggest that auditor-provided NATS
reduce future crash risk, lending support to knowledge spillover benefits being derived from
NATS. Among the control variables, the coefficient on average returns (RET) and ROA is
positive and that on return volatility is negative suggesting that firms with better stock and
accounting performance and lower volatility are more likely to experience crashes. This suggests
that crashes are unlikely to be a manifestation of declining business conditions, continuation of
poor stock performance (i.e., negative stock momentum), and/or high stock volatility. Larger
firms and high M/B firms are more prone to crash risk. BIG4 audit appears to constrain future
crash risk but the coefficient is significant in the baseline model only.
We then extend our baseline regression model by incorporating two additional
moderating variables, namely change in 4th quarter ETR (∆ETR) and the interaction between TAX
and ∆ETR (TAX*∆ETR). Since a decrease in 4th quarter ETR compared to 3rd quarter ETR is
used as a proxy for earnings management, the coefficient on the interaction variables is expected
to be negative (positive) if knowledge spillover (impairment of independence) argument
dominates. The negative (positive) coefficient, in turn, would indicate a lower (higher)
probability of crash risk. Our empirical result is consistent with the knowledge spillover
argument as the interaction variable for both crash risk measures are negative and significant at
better than the 5% level. The coefficient on baseline TAX variable continues to be negative and
significant.

25 | P a g e

Overall, test of H1 supports auditors’ constraining effect on tax expense management
courtesy of their more intimate knowledge derived from NATS which reduces subsequent crash
risk.

[TABLE 3 ABOUT HERE]
Next we examine the association between auditor-provided NATS and crash risk and whether
clients’ tax avoidance strategies strengthens or weakens the relationship. As argued before,
aggressive tax positions involve complex and risky techniques providing management with the
tools, and justifications for opportunistic managerial behavior, such as earnings manipulations,
related party transactions, and other resource-diverting activities (e.g., Chen et al. 2010; Desai
and Dharmapala 2006; Kim et al. 2011). Auditor provided NATS could threaten auditor
independence with auditors devising tax avoidance strategies for their clients. Since tax
avoidance allows managers to hoard bad news, the combined effect of auditor-provided NATS
and tax avoidance would increase the probability of crash risk (Kim et al., 2011). On the other
hand, knowledge spillover argument would suggest that incumbent auditors who are also
providing tax services would be better able to deter opportunistic tax avoidance strategies,
reducing future crash risk.
Table 4 reports results for regression equation (6). We use three proxies for tax avoidance
and find generally consistent evidence that tax avoidance increases future crash risk (the
coefficients on AVOID using SHELTER and DTAX proxies are significantly positive for both the
crash proxies). The insignificant coefficient on AVOID using ETR measure lends support to the
less aggressive nature of ETR. Our primary interest, however, is the coefficient on the interaction
variable TAX*AVOID. Results in table 6 provide mixed evidence. The coefficient on the
interaction variable is negative for both crash measures when DTAX is used as the tax avoidance
26 | P a g e

measure. For SHELTER and ETR measures, the negative and significant coefficient is only
evident for DUVOL crash measure. Taken together we find some evidence supporting
knowledge spillover benefit emanating from auditor-provided NATS, with a deterring impact on
future crash risk.

[TABLE 4 ABOUT HERE]

Our final empirical analysis examines the combined effect of NATS and tax avoidance
on crash risk for firms pursuing different business strategies. This test is motivated by the
observations that many of the firms’ tax-related decisions are influenced to a certain extent by
firm’s business strategies. Following Miles and Snow (1978, 2003) strategy typology, which
places prospectors and defenders at two extremes, Higgins et al. (2013) document an increasing
propensity for innovators to engage in more tax avoidance compared to their defender
counterparts. We argue that if auditor-provided NATS provide knowledge spillover benefits then
the mitigating effect on future crash risk would be more pronounced for firms following
innovator business strategies.
Table 5 reports result for this analysis. We include auditor-provided NATS (TAX), tax
avoidance (AVOID), and business strategy continuous score and their interactions in table 5. We
are interested in the three-way interaction variable TAX*AVOID*STRATGEY. If auditor-provided
NATS create knowledge spillovers and if such expertise allows auditors to constrain tax
avoidance behavior for firms with innovator business strategies then we should expect a negative
and significant coefficient on the three-way interaction terms. Our results is consistent with H2
as we find the coefficient on the three-way interaction term to be negative and significant for
both SHELTER and DTAX proxies. The coefficient is insignificant for ETR measure supporting

27 | P a g e

less aggressive nature of this tax avoidance measure. Because of the three-way interaction, all the
two-way interactions and main effects are also included. However, the signs on the two-way
interactions and main effects can no longer be easily interpreted after the inclusion of the threeway interaction.

Additional analyses

(i) Discretionary accruals as earnings management: In our main test we have used taxspecific earnings management technique, i.e., changes in ETR from 3rd to 4th quarter. To rule out
the possibility that earnings management as captured by Modified Jones model (1995) subsumes
the effect of tax-specific earnings management for future crash risk, we include an interaction
variable TAX*DAC in Table 4. Untabulated result reveals that the coefficient on the interactive
variable is insignificant.

(ii) Tax fee ratio: We also conducted additional analysis using fee ratio (total tax fees/total fees)
as an alternative NATS proxy. The coefficients on the interaction variables using FEERATIO are
reported below.
Variables
Fee ratio, tax expense earnings FEEt-1*∆ETRt-1
management and crash risk
Fee ratio, tax avoidance, and FEEt-1*AVOIDt-1 [SHELTER]
crash risk
FEEt-1*AVOIDt-1 [DTAX]
Fee ratio, tax avoidance, FEE*STRATEGY*AVOID [SHELTER]
STRATEGY, and crash risk
FEE*STRATEGY*AVOID [DTAX]

Lagged control variables

NCSKEW

DUVOL

-0.04**
[-2.27]
-0.06**
[-2.49]
-0.90*
[-1.63]
-0.01
[-0.85]
-0.31**
[-2.33]

-0.024*
[-1.81]
-0.06***
[-3.09]
-0.92**
[-2.13]
-0.0069
[-0.75]
-0.26**
[-2.43]

Yes

Yes

28 | P a g e

(iii) External monitoring by financial analysts, NATS, and crash risk: As discussed earlier,
agency theory view of managerial incentives for withholding bad news through earnings
management and/or tax avoidance is based on the agency tension between managers and
shareholders. Strong external monitoring mechanisms can act as complements or substitutes to
auditor monitoring. Kim et al. (2011) find that the positive relation between tax avoidance and
stock price crash risk is diminished for firms with strong external monitoring mechanisms. We
use analyst coverage as one such external monitoring mechanism. We retrieve number of
analysts following a firm from I/B/E/S and include it as an additional independent variable in
Table 3 and 4. Our primary result of the negative effect of auditor-provided NATS and the
ineteaction variables TAX*∆ETR and TAX*AVOID on crash risk remains unchanged. We also
split the sample into high analyst coverage observations (number of analyst>median) and low
analyst coverage sub-samples. Again, our main results remain robust to this analysis.

6. Conclusion
Concern about possible impairment of independence for external auditors because of the joint
provision of audit and NASs has long been a concern for regulators and investment community.
SOX-2002 prohibits auditors from providing most NASs to their clients firms except for NATS.
Regulatory mandate for this choice may have been motivated by the presumption that auditorprovided NATS generates spillover benefits for financial reporting that outweigh related
independence concern. To assess whether this indeed is the case, recent empirical studies have
examined the relation between auditor-provided NATS and different facets of financial reporting
quality and provides some support for continuing provision of tax services by incumbent
auditors. However, tax avoidance activities can create opportunities for managers to pursue
activities that are designed to hide bad news and mislead investors. Complex and risk tax
29 | P a g e

avoidance arrangements, therefore, may increase the risk of crash risk, a direct economic
consequence for investors. Consistent with this conjecture, Kim et al. (2011) find that tax
avoidance indeed increases future crash risk. Kim et al. (2011), however, did not investigate
whether auditor-provided NATS aid or deter tax-related earnings management as well as tax
avoidance behavior. Therefore external auditors’ involvement in the tax avoidance-crash risk
link remains unexplored. We fill this void in the literature.
Our empirical findings reveal that financial reporting quality, at least from the
perspective of reporting tax transactions, improve financial reporting quality and reduces the
probability of future crash risk. We, therefore, find support for spillover benefits and concur with
regulatory decision to allow audit firms providing NATS. We also find that, auditor-provided
NATS constrain tax avoidance and hence reduces the probability of crash risk for firms
following innovator business strategies,.
We contribute to the literature providing evidence on the desirability of allowing, further
constraining, or banning auditor-provided NATS (PCAOB 2004). We also extend the growing
literature on the determents of crash risk by investigating the effect of external auditors’
monitoring through the provision of NATS on crash risk. Finally, our study contributes to the
interface of organizational theory, corporate governance, and crash risk discipline by informing
investors characteristics of stock that are more likely to experience future crash risk and whether
financial reporting quality spillover benefits gained from providing NATS reduces crash risk for
those stocks.

30 | P a g e

References
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Reported Weaknesses in Internal Control. Working paper, Syracuse University and
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Appendix 1: Variable definitions
Variables
NCSKEW

DUVOL

Explanation
Negative conditional skewness of firm-specific weekly returns over the fiscal year. NCSKEW is calculated by taking the
negative of the third moment of firm-specific weekly returns for each year and normalizing it by the standard deviation of
firm-specific weekly returns raised to the third power [See text for the detailed fomula].
Down-to-up volatility measure of the crash likelihood. For each firm j over a fiscal-year period t, firm-specific weekly returns
are separated into two groups: ‘‘down’’ weeks when the returns are below the annual mean, and ‘‘up’’ weeks when the returns
are above the annual mean. Standard deviation of firm-specific weekly returns is calculated separately for each of these two
groups, and DUVOL is the natural logarithm of the ratio of the standard deviation in the ‘‘down’’ weeks to the standard
deviation in the ‘‘up’’ weeks. For both crash risk measures the firm-specific weekly return for firm j in week τ (W j,τ) is
calculated as the natural logarithm of one plus the residual return from the following expanded market model regression:

rj ,   j  1 , j rm, 2   2 , j rm, 1  3 , j rm,   4 , j rm, 1  5 , j rm, 2   j , .......(1)

TURN

RET
SDRET
ATSD
TAX (‘000)
MERGER
AUDIND
LAF
SIZE
NOL
EQINC
FI
LEV
BTM
ROA

Where r,j,τ is the return of firm j in week τ, and rm,τ is the return on CRSP value-weighted market return in week τ. The lead and
lag terms for the market index return is included to allow for nonsynchronous trading (Dimson, 1979). above. In estimating
equation (1), each firm-year is required to have at least 26 weekly stock returns.
Average monthly share turnover over the current fiscal year minus the average monthly share turnover over the previous fiscal
year, where monthly share turnover is calculated as the monthly trading volume divided by the total number of shares
outstanding during the month.
One-year weekly returns.
Standard deviation of firm-specific weekly returns over the fiscal year.
An indicator variable set equal to 1 if the firm purchased tax services from the auditor, and 0 otherwise.
Total dollar amount in thousands paid to auditors for tax services .
An indicator variable set equal to 1 if the firm participated in any merger activity during the year, and 0 otherwise.
Auditor independence from the client, measured as nonaudit fees less tax fees divided by total audit fees received from the
client.
Natural log of audit fees received from the client.
Natural log of market value of equity;
An indicator variable coded 1 if the firm reported net operating loss carryforward, and 0 otherwise.
Equity income for year t scaled by total assets at the beginning of the year.
Pre-tax foreign income for year t scaled by total assets at the beginning of the year.
Long-term debt for year t scaled by total assets at the beginning of the year.
Book-to-market ratio for the end of year t, measured as book value of equity divided by market value of equity
Return on assets for year t, measured as the ratio of income before extraordinary items to the
average of total assets for the
year
32 | P a g e

CASH
BIG4
SECTIER
ETR
SHELTER
DTAX

DAC

R&D5
EMPLOYEE5
REV5
SG&A5
SD EMPLOYEE5
CAP5
STRATEGY

Cash holding at the end of year t divided by total assets at the beginning of the year
An indicator variable set equal to 1if the firm is audited by one of the Big 4 auditors, and 0 otherwise.
An indicator variable set equal to 1 if the firm is audited by a second-tier accounting firm; namely, Grant Thornton LLP and
BDO Seidman LLP, and 0 otherwise.
ETR is defined as accumulated tax expense (Compustat quarterly #6) divided by accumulated pre-tax income (quarterly #23).
Tax shelter prediction score developed by Wilson (2009) using BTD, DAC, LEV, SIZE, ROA, FI, and R&D.
Discretionary permanent book-tax differences (DTAX), a subset of BTD. Following Frank et al. (2009) we first compute
permanent book-to-tax difference (PERMDIFF) as total book-tax differences (BTD) less temporary book-tax differences
(TXDI/STR). DTAX is defined as the residuals from the regression of PERMDIFF on several determinants of nondiscretionary
permanent differences unrelated to tax planning,
Absolute discretionary accruals calculated using the performance-adjusted Modified Jones model (Kothari, Leone, and
Wasley, 2005). We estimate the following model for all firms in the same industry (using the SIC two-digit industry code)
with at least 8 observations in an industry in a particular year, to get industry-specific parameters for calculating the nondiscretionary component of total accruals (NDAC). DAC is then the residual from model (1), i.e., DAC=ACC-NDAC. Where
ACC = Net income operating cash flows (OCF)/Lagged total assets.
ACC t   0 (1 / Assets t 1 )  1 Sales t  RECEIVABLE t   2 PPE t   3 ROAt 1   t
Where, ACC is total accruals defined as the difference between net income before extraordinary items and operating cash
flows (OCF), PPE is gross property, plant & equipment, ROA is return on assets. All variables are deflated by lagged assets.
Ratio of research and development expenditures [XRD] to sales [SALE] computed over a rolling prior 5 year average
Ratio of the number of employees [EMP] to sales [SALE] computed over a rolling prior 5 year average.
One-year percentage change in total sales computed over a rolling prior five-year average
Ratio of selling, general and administrative (SG&A) expenses to sales computed over a rolling prior five-year average.
Standard deviation of the total number of employees computed over a rolling prior five-year period
Capital intensity measured as net property, plant, and equipment scaled by total assets and computed over a rolling prior fiveyear average
Each of the above six individual variables is ranked by forming quintiles within each two-digit SIC industry-year. Within each
company-year, those observations with variables in the highest quintile are given a score of 5, in the second-highest quintile
are given a score of 4, and so on ((except capital intensity which is reversed-scored so that observations in the lowest (highest)
quintile are given a score of 5 (1)). Then for each company-year, the scores across the six variables are summed such that a
company could receive a maximum score of 30 (prospector-type) and a minimum score of 6 (defender-type).

33 | P a g e

Table 1: Panel A
Descriptive statistics

Crash risk
proxies

Tax service
variables

Business
strategy
variables
Control
variables
for crash
risk

1st stage
regression
variables

Variables
CRASH_NCSKEW t
CRASH_NCSKEWt-1
CRASH_DUVOL t
CRASH_ DUVOL t-1
TAXDUM t-1
TAX (in ‘000 dollar) t-1
ETR4-ETR3 t-1
ETR3 t-1
AVOID (SHELTER) t-1
AVOID(PERMDIFF) t-1
AVOID (ETR) t-1
STRATEGY t-1
PROSPECT t-1
DEFEND t-1
TURN t-1
RET t-1
STDRET t-1
SIZE t-1
MTB t-1
LEV t-1
|DAC| t-1
ROA t-1
MERGER t
AUDIND t
LNAF t
NOL t
EQINC t
FI t
R&D t
PPE t
CASH t
BIG 4 t
SECTIER t

Mean

SD

25%

50%

75%

Observations

-0.07
-0.01
-0.37
-0.31
0.67
302.65
0.0007
0.32
0.42
0.02
0.28
16.91
0.05
0.11
0.00
0.07
2.63
6.04
2.63
0.16
0.31
0.04
0.18
0.10
13.47
0.81
0.00
0.02
0.04
0.26
0.19
0.77
0.09

1.17
1.06
0.91
0.81
0.47
1017.67
0.09
0.12
1.96
0.17
0.16
3.66
0.21
0.32
0.10
0.01
0.04
1.99
3.38
0.18
0.59
0.18
0.38
0.15
1.55
0.39
0.00
0.04
0.08
0.24
0.22
0.42
0.29

-0.74
-0.68
-0.85
-0.80
0.00
0.00
-0.01
0.29
-0.71
-0.02
0.19
14
-0.03
0.00
0.05
4.60
1.17
0.00
0.04
-0.01
0.00
0.00
12.55
1.00
0.00
0.00
0.00
0.09
0.04
-

-0.07
-0.05
-0.29
-0.27
1.00
36.75
-0.0006
0.35
0.51
0.01
0.31
17
0.00
0.00
0.06
6.02
1.91
0.11
0.10
0.06
0.00
0.04
13.55
1.00
0.00
0.00
0.01
0.19
0.12
-

0.61
0.60
0.21
0.21
1.00
201.07
0.01
0.38
1.69
0.06
0.37
19
0.03
0.01
0.09
7.42
3.17
0.26
0.29
0.13
0.00
0.12
14.41
1.00
0.00
0.02
0.06
0.36
0.28
-

21,950
21,950
21,950
21,950
21,950
21,950
15,483
15,483
12,149
11,114
17,473
12,149
12,149
12,149
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950
21,950

34 | P a g e

Panel B: Industry distribution
Industry code

Industry

Observations

% distribution

1-14
15-17
20-21
22-23
24-27
28-30
31-34
35-39
40-48
50-51
53-59
70-79
80-99

Agriculture & mining
Building construction
Food & Kindred Products
Textile Mill Products & apparels
Lumber, furniture, paper, and printing
Chemical, petroleum, and rubber & Allied Products
Metal
Machinery, electrical, computer equipment
Railroad and other transportation
Wholesale goods, building materials
Store merchandise, auto dealers, home furniture stores
Business services
Others
Total

1,158
163
682
404
917
2,243
1,063
7,171
901
973
2,030
3,165
1,080
21,950

0.05
0.01
0.03
0.02
0.04
0.10
0.05
0.33
0.04
0.04
0.09
0.14
0.05
1.00

35 | P a g e

Panel C: Correlation analysis

NCSKEW (1)
NCSKEWt-1 (2)
DUVOL (3)
DUVOL t-1 (4)
TAX t-1 (5)

TURN t-1 (6)
RET t-1 (7)
STDRET t-1 (8)
SIZE t-1 (9)
MTB t-1 (10)
LEV t-1 (11)
|DAC| t-1 (12)
ROA t-1 (13)
BIG4 t-1 (14)

(1)
1.00
-0.00
0.80
0.04
0.02**
0.03
0.03
-0.05
0.08
0.04
-0.002
-0.01
0.05
0.04

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

1.00
-0.00
0.78
0.02**
0.04
0.07
-0.11
0.10
0.06
-0.01*
-0.001
-0.06
0.05

1.00
0.12
0.08
0.05
0.009
-0.14
0.26
0.04
0.03
-0.02**
0.19
0.14

1.00
0.08
0.03
0.11
-0.25
0.30
0.06
0.02**
-0.03
0.15
0.17

1.00
0.001
-0.02
-0.15
0.39
0.06
0.06
0.00
0.08
0.15

1.00
0.12
0.11
0.05
0.05
0.05
-0.02**
0.04
0.02**

1.00
0.16
-0.07
0.14
-0.02**
0.001
0.17
-0.001

1.00
-0.38
-0.07
0.001
0.06
-0.34
-0.17

1.00
0.05
0.31
-0.08
0.28
0.51

1.00
-0.04
0.03
0.09
0.05

1.00
-0.05
-0.04
0.16

1.00
-0.06
-0.07

1.00
0.15

1.00

Italicized and bold-faced correlations are significant at p<0.001. ** and * represent statistical significance at p<0.05 and p<0.01 respectively.
Variable definitions are in the text and in Appendix 1.

36 | P a g e

Table 2: Determinants of tax service purchase
ATSD   0  1MERGER   2 AUDIND   3 LAF   4 SIZE   5 DAC   6 NOL 
 7 EQINC   8 FI   9 R & D  10 LEV  11BTM  12 PPE  13ROA  14CASH 
15 BIG 4  16SECTIER   .....................................(4)
Variables
Constant
MERGER
AUDIND
LAF
SIZE
DAC
NOL
EQINC
FI
R&D
LEV
BTM
PPE
ROA
CASH
BIG4
SECTIER

Coefficient
-5.19***
-0.001
-0.50***
0.10***
0.20***
-0.03
0.06
-7.67*
2.86***
-0.12
0.09
0.003
-0.07
0.05
-0.09
0.51***
-0.18***

Industry FE
Year FE
Pseudo R2
Observations

Yes
Yes
0.20
21,950

z-statistics
-12.29
-0.04
-3.68
-5.18
12.43
-0.87
1.25
-1.95
5.35
-0.45
0.80
0.65
-0.66
0.53
-0.97
9.57
-2.92

***, **, and * represent statistical significance at the 1%, 5%, and 10% level respectively (two-tailed test)
Variable definitions are in Appendix 1.

37 | P a g e

Table 3: Auditor-provided non-audit tax services, financial reporting quality and crash
risk
CRASH i ,t   0  1CRASH t 1   2TAX t 1   3 ETRt 1   4TAX * ETRt 1   5 ETR3t 1 
 6TURNt 1   7 RETt 1   8 SDRETt 1   9 SIZEt 1  10 MTBt 1  11LEVt 1 
12 | DACt 1 |  13ROAt 1  14 BIG 4t 1  15 IMR   ........................................(5)
Earnings management model
Model (3)
Model (4)
Coefficient
Coefficient
[t-statistics]
[t-statistics]
Constant
-0.93**
-1.16***
[-2.71]
[-4.67]
NCSKEW t-1
-0.01*
[-1.64]
DUVOL t-1
0.02**
[2.38]
TAX t-1
-0.000019***
-0.000019***
[-2.70]
[-3.23]
∆ETRt-1
-0.0040
-0.002
[-1.04]
[-0.97]
TAXt-1*∆ETRt-1
-0.00001**
-0.000013**
[-2.33]
[-2.26]
ETR3t-1
-0.02***
-0.02***
[-3.09]
[-3.18]
TURN t-1
0.32***
0.27***
0.08
0.19**
[3.61]
[4.12]
[0.68]
[2.28]
RET t-1
1.68**
3.31***
1.21
4.01***
[1.97]
[5.04]
[1.03]
[4.47]
STDRET t-1
-0.14
-1.50***
0.66
-1.55***
[-0.48]
[-6.29]
[1.59]
[-4.96]
SIZE t-1
0.05***
0.10***
0.08
0.08***
[5.30]
[11.80]
[8.08]
[13.96]
MTB t-1
0.0082***
0.005***
0.01
0.007***
[3.34]
[2.97]
[3.49]
[4.36]
LEVt-1
-0.14**
-0.11***
-0.04
-0.05
[-2.55]
[-2.72]
[-1.10]
[-1.51]
|DAC| t-1
-0.001
-0.02
-0.009
-0.013
[-0.07]
[-1.29]
[-0.48]
[-0.91]
ROA t-1
0.10*
0.46***
0.00
0.002
[1.80]
[10.46]
[0.12]
[0.56]
BIG4
-0.09***
-0.05*
-0.02
0.02
[-2.66]
[-1.79]
[-0.55]
[0.61]
IMR
-0.06
-0.14**
0.16
-0.02
[-0.83]
[-2.39]
[1.53]
[-0.29]
Industry FE
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
Yes
Yes
Adjusted R2
0.02
0.10
0.02
0.11
Observations
21,950
21,950
15,483
15,483
***, **, and * represent statistical significance at the 1%, 5%, and 10% level respectively (two-tailed
test). Variable definitions are in Appendix 1.
Variables

Baseline model
Model (1)
Model (2)
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.25
-0.67***
[-1.07]
[-3.61]
-0.02**
[-2.44]
0.03***
[3.51]
-0.000017**
-0.000014***
[-2.16]
[-2.78]

38 | P a g e

Commented [AH1]: SIZE=ln SALES; LEV2; ROE version

Commented [AH2]: Only if size is proxied by Ln MVE and BTM
is used instead of MTB, among others.
Commented [AH3]: Both LN MVE and LN TA provide negative
and significant coefficient. Also MTB & BTM don’t affect the
results.
Commented [AH4]: Expected result. Use LNMVE (size), ROE,
BTM, and LEV2. ETR unwinsorised.

Commented [AH5]: Negative pre-tax book income excluded.
Hence a reduction in sample size

Table 4: Auditor-provided non-audit tax services, tax avoidance, and crash risk

CRASH i ,t   0   1CRASH t 1   2TAX t 1   3 AVOIDt 1   4TAX * AVOIDt 1   5TURNt 1   6 RETt 1   7 SDRETt 1   8 SIZEt 1   9 MTBt 1
 10 LEVt 1   11 | DACt 1 |  12 ROAt 1   13BIG 4t 1   14 IMR   .......................................(6)

Variables
Constant
NCSKEW t-1
DUVOL t-1
TAX t-1
AVOID t-1
TAX t-1*AVOID t-1
TURN t-1
RET t-1
STDRET t-1
SIZE t-1
MTB t-1
LEVERAGEt-1

|DAC| t-1

Avoidance=SHELTER
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.50**
-0.44**
[-2.01]
[-2.06]
-0.03***
[-3.22]
0.01
[1.13]
-0.000072*
-0.000016**
[-1.88]
[-2.20]
0.02**
0.016**
[2.19]
[2.14]
0.000017
-0.000013*
[1.39]
[-1.71]
0.38***
0.30***
[3.15]
[3.25]
2.10*
2.56***
[1.78]
[2.78]
-0.69*
-1.72***
[-1.84]
[-5.23]
0.01
0.06***
[0.83]
[6.29]
-0.00
0.0076***
[-0.11]
[3.26]
0.07*
-0.15**
[1.68]
[-2.60]

Avoidance=DTAX
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.65
-0.71**
[-1.60]
[-2.46]
-0.04***
[-3.75]
0.003
[0.31]
-0.01
-0.000020**
[-0.13]
[-2.73]
0.15*
0.11**
[1.87]
[2.08]
-0.000016*
-0.000016**
[-1.63]
[-2.13]
0.18
0.16*
[1.38]
[1.76]
1.75
4.67***
[1.41]
[4.94]
0.02
-2.01***
[0.04]
[-6.12]
0.06***
0.09***
[5.54]
[10.22]
-0.007
0.04***
[-0.59]
[2.96]
0.04
0.03
[0.88]
[1.03]

Avoidance=ETR
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.54*
-0.64***
[-1.82]
[-3.10]
-0.013
[-1.56]
0.03***
[3.44]
0.000035
0.000023
[1.53]
[1.38]
0.04
0.01
[0.58]
[0.22]
-0.00017
-0.00015**
[-1.54]
[-2.33]
0.23**
0.23***
[2.29]
[3.12]
1.05
3.15***
[1.04]
[4.21]
0.09
-1.42***
[0.27]
[-5.73]
0.05***
0.08***
[4.79]
[9.62]
0.04***
0.004**
[8.46]
[2.03]
-0.16***
-1.11**
[-2.67]
[-2.46]

0.03
[1.32]

0.02
[0.90]

0.00
[0.06]

-0.009
[-0.53]

-0.01
[-0.66]

-0.02
[-1.20]
39 | P a g e

Commented [AH6]: This should have been most negative to
support knowledge spillover for most severe form of avoidance.

Variables
ROA t-1
BIG4
IMR

Industry FE
Year FE
Adjusted R2
Observations

Avoidance=SHELTER
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.001
0.44***
[0.42]
[6.29]
-0.08*
-0.02
[-1.79]
[-0.59]
-0.17*
-0.25***
[-1.77]
[-3.62]

Avoidance= DTAX
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.002
0.003**
[1.10]
[2.13]
-0.05
-0.05
[-1.14]
[-1.47]
-0.02
-0.24**
[-0.13]
[-2.37]

Avoidance=ETR
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.18***
0.48***
[2.94]
[10.93]
-0.05**
0.0055
[-2.00]
[0.29]
-0.04
-0.18***
[-0.46]
[-2.70]

Yes
Yes
0.03
12,149

Yes
Yes
0.03
11,114

Yes
Yes
0.02
17,473

Yes
Yes
0.11
12,149

Yes
Yes
0.11
11,114

Yes
Yes
0.10
17,473

***, **, and * represent statistical significance at the 1%, 5%, and 10% level respectively (two-tailed test). Variable definitions are in Appendix 1.

40 | P a g e

Table 5: Business strategy, tax avoidance, auditor-provided non-audit tax services and crash risk
CRASH i ,t   0   1CRASH t 1   2TAX t 1   3 STRATEGYt 1   4 AVOIDt 1   5TAX * AVOIDt 1   6TAX * STRATEGYt 1 
 7 STRATEGY * AVOIDt 1   8TAX * STRATEGY * AVOIDt 1   9TURNt 1   10 RETt 1   11SDRETt 1   12SIZEt 1   13MTBt 1 
 14 LEVt 1   15 | DACt 1 |  16 ROAt 1   17 BIG 4t 1   18 IMR   .......................................(7)
Variables
Constant
NCSKEW t-1
DUVOL t-1
TAX t-1
STRATEGY t-1
AVOID t-1
TAX*AVOID t-1
TAX*STRATEGY t-1
STRATEGY*AVOID t-1
TAX*STRATEGY*AVOID t-1
TURN t-1
MEANRET t-1
STDRET t-1

AVOIDANCE=SHELTER
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.14
-0.18
[0.52]
[-0.85]
-0.03***
[-3.00]
0.02
[1.34]
-0.0002
-0.00025**
[-1.25]
[-2.09]
0.001*
-0.0001
[2.90]
[-0.38]
0.07**
0.11***
[2.26]
[4.53]
0.000078
0.000062*
[1.51]
[1.76]
-0.00009
0.000014**
[-0.90]
[2.33]
-0.002
-0.003**
[-1.38]
[-2.52]
-0.00004*
-0.000038**
[-1.60]
[-2.09]
0.33**
0.35***
[2.59]
[3.74]
3.23**
5.32***
[2.51]
[5.38]
-0.83**
-2.09***
[-2.03]
[-6.62]

AVOIDANCE= DTAX
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.68
-0.66
[-2.04]
[-2.31]
-0.04
[-3.77]
0.004
[0.36]
-0.000039
-0.000079
[-0.67]
[-2.18]
0.0042
-0.007
[1.20]
[-2.44]
0.08
0.11
[1.13]
[2.01]
0.00044
0.00077
[1.99]
[2.42]
0.0000012
0.0000032
[1.10]
[1.68]
0.05
0.04
[2.95]
[2.65]
-0.000022**
-0.000043**
[-2.33]
[-2.43]
0.20
0.16
[1.50]
[1.67]
1.92
4.49
[1.55]
[4.67]
-0.06
-1.83
[-0.14]
[-5.49]

AVOIDANCE=ETR
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.17
-0.25
[-0.49]
[-0.96]
-0.02**
[-2.19]
0.03***
[3.38]
-0.000089
-0.0000
[-0.84]
[-0.20]
0.009*
0.006
[1.87]
[1.43]
0.29
0.28
[1.10]
[1.28]
0.0004
0.00005
[1.15]
[0.20]
0.000006
-0.00001
[1.17]
[-0.76]
-0.02
-0.02
[-1.19]
[-1.44]
-0.000035
-0.000019
[-1.58]
[-0.83]
0.24**
0.23***
[2.35]
[3.01]
1.99*
3.46***
[1.95]
[4.47]
-0.05
-1.64***
[-0.16]
[-5.84]
41 | P a g e

SIZE t-1
MTB t-1
LEVERAGEt-1
|DAC| t-1
ROA t-1
BIG4
IMR
Industry FE
Year FE
Adjusted R2
Observations

AVOIDANCE=SHELTER
Coefficient
Coefficient
[t-statistics]
[t-statistics]
-0.003
0.04***
[-0.25]
[4.05]
0.00
-0.04***
[0.03]
[-2.90]
-0.06
-0.23***
[-1.04]
[-3.80]
0.03
-0.00
[1.16]
[-0.02]
0.003
0.005
[0.78]
[1.30]
-0.07
-0.01
[-1.51]
[-0.38]
-0.19**
-0.24***
[-2.11]
[-3.25]
Yes
Yes
Yes
Yes
0.03
0.11
12,149
12,149

AVOIDANCE= DTAX
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.06
0.09
[5.30]
[10.38]
-0.006
0.04
[-0.34]
[2.62]
0.04
0.03
[0.90]
[0.93]
0.02
-0.01
[0.83]
[-0.71]
0.002
0.003
[1.13]
[2.08]
-0.05
-0.04
[-1.14]
[-1.21]
-0.01
-0.21
[-0.09]
[-2.10]
Yes
Yes
Yes
Yes
0.03
0.10
11,114
11,114

AVOIDANCE=ETR
Coefficient
Coefficient
[t-statistics]
[t-statistics]
0.04***
0.07***
[3.54]
[8.52]
-0.02
0.01
[-1.44]
[1.27]
-0.008
-0.02
[-0.18]
[-0.47]
0.005
-0.02
[0.28]
[-1.05]
0.22***
0.44***
[3.22]
[7.86]
-0.10**
-0.06*
[-2.50]
[-1.94]
-0.18
-0.34***
[-1.42]
[-3.89]
Yes
Yes
Yes
Yes
0.03
0.10
17,118
17,118

***, **, and * represent statistical significance at the 1%, 5%, and 10% level respectively (two-tailed test). Variable definitions are in Appendix 1.

42 | P a g e