Does the Manager’s Tone Reflect Opportunistic Behavior and the Professionalism of the External Auditors?

We examine whether tax-avoiding firms whitewash their behavior by disclosing a more positive tone in Management Discussion and Analysis (MD&A) and the impact of industry professional auditors on this relationship. Using data from listed Chinese firms from 2008 to 2021, we find that tax-avoiding firms disclose a more positive tone to minimize investors’ negative perceptions of tax avoidance. Industry-specialist auditors, especially those from non-Big 4 firms, strengthen the relationship between tax avoidance and tone, indicating that they use their expertise to advise client firms on tax avoidance strategies while condoning impression management by managers to cover up tax avoidance. We also find that analyst attention mediates the relationship between tax avoidance and a positive tone, and using a positive tone to mask tax avoidance ultimately decreases firm value and increases managerial empire-building activities. This study provides evidence that managerial tone provides tax avoidance opportunities for managers and auditors.