IDEAS home Printed from https://ideas.repec.org/p/zbw/arqudp/149.html
   My bibliography  Save this paper

Firm valuation and the uncertainty of future tax avoidance

Author

Listed:
  • Jacob, Martin
  • Schütt, Harm

Abstract

The paper studies the effect of uncertainty in tax avoidance on firm value. We first show in a clean surplus valuation model that expected tax rates interact with expectations about future profitability. This paper builds and tests a valuation framework that incorporates two outcome dimensions of corporate tax avoidance strategies: the stability and the level of expected tax rates. We develop a tax planning score that captures these two dimensions. The measure improves the prediction of future tax avoidance. We finally show that the tax planning score strengthens the effect of pre-tax earnings on firm value. Firms with effective and persistent tax planning have a stronger effect of pre-tax earnings on firm value while firms with poor tax planning or volatile effective tax rates receive a discount on their earnings.

Suggested Citation

  • Jacob, Martin & Schütt, Harm, 2013. "Firm valuation and the uncertainty of future tax avoidance," arqus Discussion Papers in Quantitative Tax Research 149, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:149
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/86156/1/770820859.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Liu, J & Thomas, J, 2000. "Stock returns and accounting earnings," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 71-101.
    2. Armstrong, Christopher S. & Blouin, Jennifer L. & Larcker, David F., 2012. "The incentives for tax planning," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 391-411.
    3. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    4. Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 321-387, September.
    5. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    6. Barth, ME & Elliott, JA & Finn, MW, 1999. "Market rewards associated with patterns of increasing earnings," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 387-413.
    7. Scott D. Dyreng & Bradley P. Lindsey, 2009. "Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms' Tax Rates," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1283-1316, December.
    8. Richardson, Grant & Lanis, Roman, 2007. "Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia," Journal of Accounting and Public Policy, Elsevier, vol. 26(6), pages 689-704.
    9. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    10. Harris, TS & Kemsley, D, 1999. "Dividend taxation in firm valuation: New evidence," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 275-291.
    11. Dhaliwal, Dan & Erickson, Merle & Frank, Mary Margaret & Banyi, Monica, 2003. "Are shareholder dividend taxes on corporate retained earnings impounded in equity prices? Additional evidence and analysis," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 179-200, June.
    12. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    13. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    14. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    15. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Flagmeier, Vanessa & Müller, Jens & Sureth-Sloane, Caren, 2017. "When do managers highlight their effective tax rate?," arqus Discussion Papers in Quantitative Tax Research 214, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Brooks, Chris & Godfrey, Chris & Hillenbrand, Carola & Money, Kevin, 2016. "Do investors care about corporate taxes?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 218-248.
    3. Niemann, Rainer & Sureth, Caren, 2016. "Does capital tax uncertainty delay irreversible risky investment?," arqus Discussion Papers in Quantitative Tax Research 209, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Rainer Niemann & Caren Sureth-Sloane, 2016. "Does Capital Tax Uncertainty Delay Irreversible Risky Investment?," CESifo Working Paper Series 6046, CESifo.
    5. Flagmeier, Vanessa, 2017. "The information content of tax loss carryforwards: IAS 12 vs. valuation allowance," arqus Discussion Papers in Quantitative Tax Research 216, arqus - Arbeitskreis Quantitative Steuerlehre.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Jacob & Anna Rohlfing-Bastian & Kai Sandner, 2021. "Why do not all firms engage in tax avoidance?," Review of Managerial Science, Springer, vol. 15(2), pages 459-495, February.
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Huo, Weidong & Fu, Chengbo & Huang, Ying & Zheng, Steven Xiaofan, 2018. "The valuation of ADR IPOs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 215-226.
    4. Kevin Holland & Sarah Lindop & Nor Shaipah Abdul Wahab, 2022. "How Do Managers and Shareholders Respond to Taxation? An Analysis of the Introduction of the UK Real Estate Investment Trust Legislation," Abacus, Accounting Foundation, University of Sydney, vol. 58(2), pages 334-364, June.
    5. Taylor, Grantley & Richardson, Grant, 2014. "Incentives for corporate tax planning and reporting: Empirical evidence from Australia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(1), pages 1-15.
    6. Elisabeth Bustos-Contell & Salvador Climent-Serrano & Gregorio Labatut-Serer, 2017. "Offshoring in the European Union: a Study of the Evolution of the Tax Burden," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 11(2), June.
    7. John R. Graham & Michelle Hanlon & Terry Shevlin, 2011. "Real Effects of Accounting Rules: Evidence from Multinational Firms’ Investment Location and Profit Repatriation Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 137-185, March.
    8. Jaafar, Aziz & Thornton, John, 2015. "Tax Havens and Effective Tax Rates: An Analysis of Private versus Public European Firms," The International Journal of Accounting, Elsevier, vol. 50(4), pages 435-457.
    9. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate governance, incentives, and tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 1-17.
    10. Asiri, Mohammed & Al-Hadi, Ahmed & Taylor, Grantley & Duong, Lien, 2020. "Is corporate tax avoidance associated with investment efficiency?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    11. Donohoe, Michael P., 2015. "The economic effects of financial derivatives on corporate tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 1-24.
    12. Gallemore, John & Labro, Eva, 2015. "The importance of the internal information environment for tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 149-167.
    13. Jean Jinghan Chen & Peng Cheng & Xinrong Xiao, 2011. "Related party transactions as a source of earnings management," Applied Financial Economics, Taylor & Francis Journals, vol. 21(3), pages 165-181.
    14. Chao Jiang & Thomas R. Kubick & Mihail K. Miletkov & M. Babajide Wintoki, 2018. "Offshore Expertise for Onshore Companies: Director Connections to Island Tax Havens and Corporate Tax Policy," Management Science, INFORMS, vol. 64(7), pages 3241-3268, July.
    15. Sam Han & Justin Yiqiang Jin & Tony Kang & Gerald Lobo, 2014. "Managerial Ownership and Financial Analysts’ Information Environment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(3-4), pages 328-362, April.
    16. Herita Akamah & Ole-Kristian Hope & Wayne B Thomas, 2018. "Tax havens and disclosure aggregation," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 49-69, January.
    17. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    18. Moore, Jared A. & Suh, SangHyun & Werner, Edward M., 2017. "Dual entrenchment and tax management: Classified boards and family firms," Journal of Business Research, Elsevier, vol. 79(C), pages 161-172.
    19. Bradshaw, Mark & Liao, Guanmin & Ma, Mark (Shuai), 2019. "Agency costs and tax planning when the government is a major Shareholder," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 255-277.
    20. Chan-Jane Lin & Tawei Wang & Chao-Jung Pan, 2016. "Financial reporting quality and investment decisions for family firms," Asia Pacific Journal of Management, Springer, vol. 33(2), pages 499-532, June.

    More about this item

    Keywords

    firm valuation; tax avoidance; tax uncertainty;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:arqudp:149. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: http://www.arqus.info/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.