Effects of Management and Media Disclosures of Corporate Tax Evasion on Investor Judgments

  • Ming Wei Gabriel CHUA (Speaker)

Activity: Talks or PresentationsOther Invited Talks or Presentations


This study examines nonprofessional investors' reactions to disclosures of corporate tax evasion by company management and the media. Specifically, it examines the effects of management disclosure strategies (no disclosure, symbolic disclosure, substantive disclosure) and the presence/absence of media disclosures of tax evasion in a 3 x 2 between-subjects experimental design. Participants provided three judgments for a hypothetical company that had engaged in tax evasion: short-term prospects for return on investment, long-term prospects for return on investment, and willingness to maintain their current level of investment in the company. ANOVA models revealed that media disclosure of tax evasion (a very credible signal) had a highly significant main effect on all judgments. The main effect for management disclosure strategy did not approach significance for any of the investor judgments. However, for all judgments there was a significant interactive effect of management disclosure strategy and the presence/absence of media disclosure. This interaction was driven by the particularly strong negative effects of media disclosure in cases where management made no disclosure of the tax evasion event in the financial statement footnotes (the "caught off guard" effect). This interaction effect provides evidence that investors value tax compliance from a moral or ethical perspective. Mean comparisons indicated that investors' judgments of short-term prospects and willingness to invest in the company were significantly lower when management proactively disclosed the tax evasion event relative to the control group (no management disclosure, no media disclosure). This effect was marginally significant in the case of long-term prospects. Proactive management disclosure had a highly significant positive influence on judgments of short-term prospects and investment decisions relative to media disclosure only. Again, this effect was marginally significant for long-term prospects. The specific form of management legitimation strategies (symbolic vs. substantive) had no significant impact on any of the dependent measures. Based on these results, it appears that the mere disclosure by management of the fact that tax evasion occurred (a highly credible signal) significantly influenced judgments, but investors placed little credence in the detailed explanations of the tax evasion events and remediation strategies provided by management (a less credible signal). Supplemental analyses supported our contention that the perceived morality of management plays an important role in investors' reactions to corporate tax evasion.
Period3 Mar 2021
Event titlePostgraduate Seminar Series
Event typePublic Lecture