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Tax Authority Monitoring and Equity Pricing: A Revision to Prior Inferences

Patrick L. Hopkins et al.

Journal of the American Taxation Association2025https://doi.org/10.2308/jata-2024-007article
AJG 3ABDC A
Weight
0.37

Abstract

We re-examine the role of tax authority monitoring in equity pricing. Prior research documents a negative association between IRS audit probability and the cost of equity capital. By contrast, when using improved audit probability data and two firm-specific tax authority monitoring proxies, we identify a positive association between tax authority monitoring and the cost of equity. We find that a nonlinear association between monitoring and the cost of equity potentially accounts for these contradictory conclusions. Our results suggest that, on average, investors perceive the potential negative consequences of tax authority monitoring (e.g., increased tax payments) as outweighing the value-enhancing consequences (e.g., reduced managerial rent extraction), resulting in a higher cost of equity. Consistent with this interpretation, our results are stronger among firms with the opportunity to engage in intangibles-based income shifting, a lucrative but highly scrutinized tax avoidance opportunity, and weaker among firms without other strong external monitoring mechanisms.

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https://doi.org/https://doi.org/10.2308/jata-2024-007

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@article{patrick2025,
  title        = {{Tax Authority Monitoring and Equity Pricing: A Revision to Prior Inferences}},
  author       = {Patrick L. Hopkins et al.},
  journal      = {Journal of the American Taxation Association},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.2308/jata-2024-007},
}

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Tax Authority Monitoring and Equity Pricing: A Revision to Prior Inferences

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Evidence weight

0.37

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.16 × 0.4 = 0.06
M · momentum0.53 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.