Heading towards the Tipping Point? A Swedish study on tax-avoiding activities and future stock crash risk

Abstract: Using a sample consisting of Sweden's most traded stocks for the period 1999-2015, this paper provides robust evidence that long-run corporate tax avoidance increases the risk of future firm-specific stock price crashes. The findings are consistent with the agency view that the complex and opaque characteristics of tax-avoiding activities provide managers with a powerful toolkit for covering and rationalising opportunistic behaviour. The tendency to mask and manipulate performance results in bad news being hoarded within the company, which sooner or later heads towards a tipping point in which it becomes unmanageable to prevent the news from seeping out to the public. When such tipping point is reached, the hoarded news are all revealed at once, causing an immediate down-adjustment in price - a stock price crash. The results are aligned with American studies, although somewhat remarkable, considering the renowned Swedish Corporate Governance Code known for its promotion of transparency.