Common auditors, managerial outlook and corporate tax avoidance: evidence from an emerging market context

Abstract

The purpose of this study is to examine how common auditors, defined as audit firms jointly serving focal companies and their major customers, are associated with corporate tax avoidance, conditional on managerial outlook. Focusing on an emerging market setting, the analysis investigates whether audit network structures interact with proxy based indicators of managerial optimism and pessimism in shaping tax outcomes. Using 1,500 firm-year observations, the authors construct an ordinal measure capturing the intensity of common auditor network overlap. Managerial outlook is proxied through observable financial and ownership indicators reflecting firms’ revealed expectations. The empirical strategy relies on fixed effects panel regressions, complemented by propensity score matching (PSM) to evaluate sensitivity to selection on observables. The fixed effects estimates indicate that the association between common auditors and effective tax rates differs across managerial outlook classifications. However, the PSM results are statistically weaker and largely insignificant, suggesting that the magnitude and strength of these relationships are sensitive to identification strategy and should be interpreted with caution. The directional consistency across methods provides indicative, but not definitive, support for a behavioral conditioning mechanism. This study contributes to the auditing and behavioral accounting literature by linking audit network interconnectedness with managerial behavioral traits in an emerging market context. By framing common auditor relationships through a behavioral lens, the study offers associative evidence on how managerial outlook may condition auditor–client spillovers in tax planning, while acknowledging the methodological and identification constraints.