Corporate Tax Avoidance and Firm Value Discount

Richard Herron () and Rajarishi Nahata
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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

Quarterly Journal of Finance (QJF), 2020, vol. 10, issue 02, 1-50

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.

Keywords: Tax avoidance; valuation; corporate governance (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S2010139220500081

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