Abstract

Product market power is a firm’s ability to determine the price, quality and nature of the product, which allows the firm to engage in riskier decision makings. As tax avoidance is also a risky decision making with potentially high return, product market power provides greater incentives for firms to engage in tax avoidance. Using a sample of 4,235 company－year observations spanning fiscal years 2002 through 2014, we examine the impact of product market power on tax avoidance. We also explore whether the product market leaders’tax avoidance strategies influence the tax avoidance strategies of other firms. In addition, we further examine how firms mimic product market leaders’tax avoidance strategies. We measure a firm’s product market power using the industry－adjusted, firm specific price－cost margin (PCM) called lerner index. We employ four tax avoidance measures：book effective tax rate(ETR), cash effective tax rate(CETR), long－run book effective tax rate(LRETR), and long－run cash effective tax rate(LRCETR). Our findings are summarized as follows. First, we find that PCMs are negatively related to CETR and LCETR measure only, partially supporting our hypothesis that product market power is positively related to tax avoidance. Second, we find that firms’CETR and LCETR is associated with the product market leaders’prior－year CETR and LCETR. Finally, we find that mimicking of the tax avoidance strategies of product market leaders occur only when firms share external auditors with product market leaders. We speculate that the result is due to auditors’accessibility to the information about market leaders’tax strategies. This study contributes to multiple research literatures. Our study provides empirical evidence on the relation between product market power and tax avoidance of Korean firms. We also contribute to the literature by providing evidence that mimicry of tax avoidance strategy is made through interlocking auditors.

Keywords

• Product Market Power
• Tax Avoidance
• Mimicry of Tax Avoidance
• Auditor

Related Articles

• The Relationship between Product Market Power and Tax Avoidance Affects on Investors and the Companies in the Industry

  Im Hyeon Kim

  18(1) 77-113

  Abstract Full Text for PDF

• Tax Specialist Auditors and Tax Avoidance: Small and Medium－Sized Accounting Firms

  Hyun Ah Kim

  26(1) 9-36

  Abstract Full Text for PDF

• ESG, Business Strategy, and Tax Avoidance

  Yong－Ki Kim , Sung Ook Park

  23(5) 53-78

  Abstract Full Text for PDF

• The Effect of Accounting Firm Mergers on Corporate Tax Avoidance of Auditees

  Bae, Seongho

  21(6) 189-209

  Abstract Full Text for PDF

• The Effect of Corporate Tax Strategy on Corporate Bond Yields

  KYONGSUN HEO , EUNG GIL KIM , Seoyoung Doo

  20(3) 105-135

  Abstract Full Text for PDF