Reference dependence and corporate tax planning: evidence from U.S. firms

Purpose Drawing on reference dependence theory, this study aims to investigate how firms’ tax reference positions – defined relative to peer effective tax rates – affect subsequent changes in corporate tax planning behavior. Design/methodology/approach Using U.S. firm-level data from 1993 to 2017, the author construct tax reference positions based on industry peer effective tax rates and apply a change-form regression model to examine their association with future tax planning. The U.S. institutional setting, characterized by major regulatory reforms (e.g. Sarbanes–Oxley Act), heightened tax transparency, and evolving disclosure and enforcement policies, provides an ideal context to study behavioral responses to peer and legitimacy pressures. Entropy balancing and firm fixed effects are used to strengthen identification. Findings The analysis reveals that firms with higher tax reference positions subsequently reduce both book and cash effective tax rates, suggesting that perceived deviations from peer benchmarks influence tax strategy. These effects are stronger for smaller and less profitable firms and remain robust across specifications. Practical implications The findings suggest that peer tax comparisons shape tax strategies, highlighting the behavioral responses to competitive and legitimacy pressures. This study has implications for regulators, managers and tax policymakers. Originality/value To the best of the author’s knowledge, this study is among the first to identify tax reference positions as a behavioral driver of corporate tax avoidance. It broadens the tax planning literature by incorporating psychological theory and emphasizing the social context of tax decisions. The U.S. offers a suitable setting due to evolving disclosure rules, greater transparency, and reforms like Sarbanes–Oxley, which heighten firms’ sensitivity to peer comparisons and legitimacy concerns.