This study examines the role of media sentiment in shaping corporate tax behaviour. Unlike prior research that focuses on the linear association between governance mechanisms and the level of tax avoidance, we argue that firms target an optimal level of tax avoidance and that media sentiment induces firms to adjust when they deviate from this target. Consistent with this view, we find that negative media sentiment is associated with incremental increases (decreases) in three-year cash effective tax rates (CETRs) when firms’ CETRs fall below (above) their target levels. This effect is stronger among firms that are more sensitive to reputation concerns, such as those with limited self-disclosed positive news, shorter-tenured or relatively young CEOs, and prior negative media coverage related to tax avoidance. In contrast, the effect is not significant for firms facing higher noncompliance costs, including those with greater tax audit risk, increased scrutiny from tax authorities, or prior tax-related restatements. Overall, our findings highlight the role of the media as an external governance mechanism and support a target-adjustment view of corporate tax avoidance, with reputation concerns likely playing an important role.
Cheng et al. (Wed,) studied this question.