Introduction

This paper examines the impact of disputed tax litigation risk (DTLR hereafter) on the firm performance and stock return behaviour. Over the years, a growing body of research in accounting and finance literature identified the potentially plausible risk parameters that influence firm performance. Amid the growth of related strands of literature, research in accounting and finance has given significant focus on the impact of litigation risk on corporate decisions. Previous studies have investigated the impact of litigation risk on various corporate decisions such as managers’ financial reporting and disclosure decisions (Skinner, 1994, 1997; Johnson et al., 2000, 2001; Lennox and Park, 2006), cash holdings, and investment decisions (Foley et al. 2007; Arena and Julio, 2011,2015; Malm, 2014; Malm and Kanuri, 2016), firm credit ratings (Xie, 2015), equitybased compensation (Dai et al., 2008; Jayaraman and Milbourn, 2009), conservatism in debt contracting (Beatty et al., 2008), firms disclosure behavior (Skinner, 1994), underpricing of initial public offering (Lowry and Shu, 2002) and shareholder wealth implication due to cross-sectional variation in stock return (Bizjak, 1995; Bhagat et al., 1994, 1998). The available literature argues that litigation risk influences managers’ incentives for safeguarding shareholder interest, firm’s future growth potential, and influences corporate financial policy (Arena and Julio, 2011, 2015; Skinner, 1994). Moreover, litigation risk exerts a disciplinary influence on corporate practices relating to executive compensation, executive and board turnover, corporate investment, and voluntary disclosure (Field et al., 2005; Ferris et al., 2007; Kim and Skinner, 2012; Lowry, 2009; McTier and Wald, 2011; Rogers and Van Buskirk, 2009; Rogers et al., 2011; Qing, 2011). In essence, there is little doubt that litigation is an important part of the corporate environment (Bizjak, 1995).