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Corporate Tax Avoidance and Firm Value Discount

Author

Listed:
  • Richard Herron

    (D’Amore-McKim School of Business, Northeastern University, 413 Hayden Hall, 360 Huntington Avenue, Boston, Massachusetts 02115, USA)

  • Rajarishi Nahata

    (Baruch College, CUNY, Box B10-225, One Bernard Baruch Way, New York, NY 10010, USA)

Abstract

We analyze the valuation-tax avoidance relation and find there is, in fact, a market value discount for tax avoidance. We identify several channels for the adverse valuation effects of tax avoidance. Tax-avoiding firms that (i) lack foreign income, (ii) are financially constrained, and (iii) incur relatively high capital expenditures have lower valuations. A portfolio long the highest and short the lowest tax-avoiding firms has a significantly positive four-factor alpha, highlighting greater risk and thus lower valuation associated with tax avoidance. Our results are robust to a variety of tests, including several different tax avoidance measures.

Suggested Citation

  • Richard Herron & Rajarishi Nahata, 2020. "Corporate Tax Avoidance and Firm Value Discount," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-50, June.
    • Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:02:n:s2010139220500081
    DOI: 10.1142/S2010139220500081
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    Cited by:

    1. Habib Saragih, Arfah & Ali, Syaiful & Suwardi, Eko & Utomo, Hargo, 2024. "Finding the missing pieces to an optimal corporate tax savings: Information technology governance and internal information quality," International Journal of Accounting Information Systems, Elsevier, vol. 52(C).
    2. Arfah Habib Saragih & Syaiful Ali, 2023. "Corporate tax risk: a literature review and future research directions," Management Review Quarterly, Springer, vol. 73(2), pages 527-577, June.

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