Abstract

This study aims to investigate if peers’ tax-saving success influences a firm’s tax aggressiveness. Relying on the inter-dependence amongst firms, the proposition that a firm would change its tax payment decisions is when it observes that its peer group achieves tax-saving success. A peer group was defined as the five firms most similar in size to the focal firm in the same industry. The authors examine whether peers’ tax level motivates the focal firm to adjust its tax strategy by controlling the effect of industrial leaders, whose profit margins are ranked top three in the industry. It was found that firms tend to mimic the average tax performance of their peers by changing their own tax burden. Additionally, this peer effect in the tax setting is more pronounced for firms with higher tax burden, lower profitability and less cash hold, revealing the asymmetric responses of firms to their peers’ performances under the above-mentioned conditions. The results also survive numerous robustness tests, including alternative measures of tax avoidance, different industry classifications and instrumental tests. The researchers provide empirical evidence of peer effects in tax payment decisions. The findings also suggest a novel way to detect tax-avoiding activities, which are likely to happen in a clustered manner.

Key words: Tax-saving decision; tax aggressiveness; peer effects.