Impact of disputed tax litigation risk on firm performance: evidence from India

TLDR: In this article, the authors investigated the impact of tax litigation risk on firm performance and stock return behavior using a sample of Indian listed firms, and found that higher tax litigation risks are associated with higher expected returns.

Abstract: The purpose of this study is to investigate the impact of disputed tax litigation risk on firm performance and stock return behavior using a sample of Indian listed firms,The authors use disputed tax liability, reported as a contingent liability by the listed firms, as a proxy for the disputed tax litigation risk To examine the impact of disputed tax litigation risk on firm performance (measured by accounting and market-based measures), the empirical approach used in this study focusses on the panel estimation technique A portfolio-based approach using alternative asset pricing models examines the cross-sectional return variation because of the influence of disputed tax litigation risk,The results of this study show a negative relationship between firm performance measures and disputed tax litigation risk Cross-sectional test results reveal that higher disputed tax litigation risk is associated with higher expected returns,This study focusses on disputed tax reported under the heading of contingent liability as a proxy for litigation risk The study will help investors and portfolio managers to consider disputed tax litigation risk as an important parameter in the evaluation of firm performance This study will also help regulators to get feedback on tax related policies and improve the dispute resolution process,This study adds to the existing literature on the relationship between litigation risk and firm performance In the context of emerging market, this study is the first-of-its-kind study, which focusses on disputed tax as a litigation risk proxy and examines its possible impact on firm performance and stock return behavior