Relative valuation of alternative methods of tax avoidance

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Virginia Tech


This paper examines the relative valuation of alternative methods of tax avoidance. Prior studies find that firm value is positively associated with overall measures of tax avoidance; I extend this research by providing evidence that investors distinguish between methods of tax reduction in their valuation of tax avoidance. The impact of tax avoidance on firm value is a function of tax risk, permanence of tax savings, tax planning costs, implicit taxes and contrasts in disclosures of tax reduction in the financial statements. My empirical results suggest that tax avoidance resulting from stock option tax benefits is positively associated with firm value, accelerated depreciation is not associated with firm value and deferral of residual tax on foreign earnings is negatively associated with firm value. Prior studies that find the positive association between firm value and tax avoidance is attenuated in poorly governed firms suggest the discount results from investor concern of managerial opportunism. Self-serving managers conceal diversion of tax savings from investors under the pretext that aggressive tax positions must be hidden from tax authorities in the financial statements. Under this theory transparent tax reduction methods that are clearly supported by the law should not be discounted by investors of poorly governed firms. However, I find that tax avoidance resulting from transparent stock option tax deductions is discounted in poorly governed firms, while tax avoidance derived from opaque deferral of the residual tax on foreign earnings is not, inconsistent with investors believing that managers are exploiting the compromised information environment associated with complex tax transactions.



Tax Avoidance, firm value, corporate governance