Does Tax Risk Affect Investor Valuation of Tax Avoidance?

Research output: Contribution to journalArticle

19 Scopus citations

Abstract

We examine how investors value tax avoidance (measured as the level of cash effective tax rates [ETRs]) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery of sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

Original languageEnglish (US)
Pages (from-to)151-176
Number of pages26
JournalJournal of Accounting, Auditing and Finance
Volume34
Issue number1
DOIs
StatePublished - Jan 1 2019

Keywords

  • corporate tax avoidance
  • firm valuation
  • tax risk
  • uncertain tax positions

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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