The Value Implications of Tax Avoidance Across Countries
41 Pages Posted: 20 Oct 2017
Date Written: Feb 1, 2016
Abstract
Motivated by two competing views on the value implications of tax avoidance, this study examines how investors perceive tax avoidance behavior in an international setting. Using a sample of 42,107 firm-year observations from 46 countries over the 2001-2010 period, I find that the average relation between tax avoidance and firm value (as measured by Tobin’s Q) is positive and significant. This relation, however, is mitigated in countries with little control over self-dealing, weak corporate governance, and high levels of corruption. While tax avoidance is more value enhancing in developed and common law countries, I find no evidence that a country’s adoption of IFRS, book-tax conformity or aggregate earnings quality is associated with investor perceptions of tax avoidance. Overall, the results suggest that tax avoidance creates value for shareholders and that the value of tax avoidance is driven by the heterogeneous agency costs associated with different institutions.
Keywords: firm value, investor protection, legal institutions, self-dealing, cross-country study, tax avoidance
JEL Classification: D46, G15, H26, M41
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