Tax Authority Monitoring, Tax Planning, and Earnings Mispricing

Abstract

This study investigates whether tax authority monitoring is associated with earnings mispricing, measured by post-earnings announcement drift (PEAD), in U.S. public firms from 2010 to 2021. We use two distinct proxies for monitoring: the resolution pattern of uncertain tax benefits and IRS download activity of firms’ 10-K filings from EDGAR. We find that greater tax authority monitoring is associated with significantly stronger PEAD, suggesting that regulatory scrutiny may increase investor uncertainty and delay the incorporation of earnings news into stock prices. This effect is most pronounced in firms with higher levels of tax planning, where reporting opacity is greater. Additional analyses confirm the robustness of our results using alternative earnings surprise metrics, event windows, and tax planning proxies. These findings highlight tax authority oversight as a previously unrecognized institutional factor contributing to earnings mispricing, and they offer new insights into how enforcement interacts with firm disclosure environments to affect capital market efficiency.