Does Tax Avoidance Induce Earnings Persistence? An Empirical Study in Korea

This study investigates whether tax avoidance increases the link between current and future earnings. The cash flows generated by tax avoidance are verified to increase the sustainability of earnings. The sustainability of the earnings is regard as a criterion for determining the quality of accounting information. The study seeks to confirm whether tax avoidance had a positive or negative effect on accounting information. For this purpose, we use Korean capital market, from 2006 to 2018. Tax avoidance was measured using the effective tax rate, and earnings sustainability is the correlation between the current and future earnings as presented in Sloan (1996). The analysis results are summarized as follows. First, tax avoidance has been shown to increase the sustainability of earnings. Second, the components of the continuity of earnings that tax avoidance increases were observed as cash flows. That is, the cash flows generated by tax avoidance have been shown to make greater relevance between the current period and the future earnings. The results of this study have expanded the studies on tax avoidance and earnings persistence. In addition, amid conflicting studies of the effects of tax evasion on firm value and accounting information, this study provides additional empirical evidence of this contribution.