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Evan Eastman, Florida State University; Anne Ehinger, Florida State University, Jianren Xu, University of North Texas
This study examines the impact of enterprise risk management (ERM) programs on corporate tax avoidance. ERM is a holistic approach to managing an enterprise’s entire portfolio of risks (COSO 2004; 2017). We expect that enhanced coordination across business units as a result of ERM allows firms to exploit tax avoidance opportunities, while also mitigating overly aggressive tax positions. We hand-collect data on ERM adoption for a sample of S&P 500 firms from 1993 to 2016. We empirically document that firms with ERM programs have lower cash effective tax rates (ETRs) and are less likely to engage in tax shelter than non-ERM adopters. We instrument for ERM adoption using a firm’s exposure to natural catastrophes and our results are robust. Additionally, we find that the relation between ERM and tax avoidance is stronger among financially constrained firms and firms with higher managerial risk-incentives.
