News on Tax-related Litigations and Consumer Purchases

Given the conflicting anecdotal and empirical evidence concerning consumer-related reputational costs of tax aggressiveness, I examine the association between negative news on tax-related litigations —potential tax-related corporate misconduct— and consumer purchases. Leveraging quarterly financial data and hand-collected news for consumer-oriented S&P 500 firms, I find that selected tax news is associated with reduced sales and decreased sales growth. However, I observe no changes in consumer purchases in response to government announcements of corporate misconduct, suggesting the negative association is attributable to media attention and tax-related issues. Further, this association is stronger for small firms, previous tax-aggressive firms, firms with homogeneous products, first-time news, articles featuring tax headlines, and articles covering unfavorable court or government allegations, regardless of the final decision status. Consumers are also sensitive to the negative tone of selected tax news. Overall, my findings are consistent with media coverage of potential tax-related corporate misconduct deterring consumer purchases. My findings inform the policymakers that news media has a more powerful influence on consumers than government announcements of corporate misconduct.