The Effect of Corporate Tax Avoidance on the Cost of Equity

Abstract

While prior studies have examined how investors perceive extreme forms of tax avoidance behavior such as tax sheltering and uncertain tax position (e.g., Hanlon and Slemrod 2009;Wilson 2009;Koester 2011;Hutchens and Rego 2012), there is little evidence on how investors perceive less extreme forms of tax avoidance. This study fills this void by examining the relation between firm's cost of equity and corporate tax avoidance using three measures that capture less extreme forms of corporate tax avoidance: book-tax differences, permanent book-tax differences, and long-run cash effective tax rates. We find that less aggressive forms of corporate tax avoidance significantly reduces a firm's cost of equity. Further analyses reveal that this effect is stronger for (i) firms with better outside monitoring, (ii) firms that likely realize higher marginal benefits from tax savings, and (iii) firms with better information quality. Our study presents large-sample results on how investors perceive less aggressive corporate tax avoidance and shows that tax planning is a value-enhancing activity for shareholders. Choudhary, P., Koester, A., Shevlin, T., 2012. Assessing tax accrual quality. Working Paper, Georgetown University. Claus, J., Thomas, J., 2001. Equity premia as low as three percent? Evidence from analysts' earnings forecasts for domestic and international stock markets. The Journal of Finance 56 (5), 1629-1666. Dechow, P.M., Dichev, I.D., 2002. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77, 35-59. Denis, D.J., Sibilkov, V., 2010. Financial constraints, investment, and the value of cash holdings. Review of Financial Studies 23 (1), 247-269. Desai, M., 2004. The degradation of corporate profits. Harvard University, working paper. 34 Desai, M., Dharmapala, D., 2006. Corporate tax avoidance and high-powered incentives.

Corporate Tax Payments and Corporate Social Responsibility: Complements or Substitutes? Empirical Evidence from Europe

“…Similarly, corporate taxes might be merely perceived as operating expenses that should be minimised as much as possible [20,31]. Tax avoider can also benefit from lower cost of equity [32]. However, there can be economic restrictions of tax avoidance such as the risk of stock price crash due to tax avoidance or increased information asymmetry and agency problems between borrowers and lenders resulting in higher financing costs [33][34][35].…”

The Effects of Tax Avoidance, Accrual Earnings Management, Real Earnings Management, and Capital Intensity on the Cost of Equity

“…Size was included as a control variable to control empirical measurement error in the company beta (Goh et al, 2016). Therefore, size was also a fundamental factor against risk (Francis et al, 2004;Goh et al, 2016;Kim & Sohn, 2013).…”

“…Thus, BM was also a fundamental factor against risk (Francis et al, 2004;Goh et al, 2016;Kim & Sohn, 2013). BM was measured by using book value equity ratio to equity market value.…”

“…Tax avoidance will significantly decrease the cost of equity (Goh, Lee, Lim, & Shevlin, 2016). With tax avoidance, the company will gain greater cash availability that can be used in production or investment activities thus increasing future cash flows generated by the company.…”

Development of corporate associations of construction industrial enterprises and subjects of financial and credit environment by financial infrastructure merging

“…The joint economic planning process should be defined [6]: a system of interrelated objectives, taking into account their priority; tasks that will have to decide on the various stages of preparation and implementation of banking products; the mechanisms and methods of achieving these goals.…”