Derivative financial instruments, tax aggressiveness and firm market value

Tao Zeng

Journal of Financial Economic Policy, 2014, vol. 6, issue 4, 376-390

Abstract: Purpose - – The purpose of this study is to examine the relationship of using derivative financial instruments, tax aggressiveness and firm market value. Design/methodology/approach - – This paper develops analytical models and designs an empirical study. Findings - – Using data from large Canadian public companies, this paper finds that a firm’s realized losses or unrealized gains from using derivatives are negatively associated with its effective tax rate, and a firm’s realized losses or unrealized gains from using derivatives are positively associated with its market value. Research limitations/implications - – This study simplifies the analytical model by separating the firm’s intrinsic market value from the tax-timing option value. In a more general framework, the tax-timing option value could be subsumed in the firm’s market value, and the firm’s market value would be determined endogenously. Originality/value - – This study develops a framework to show how firms exploit the tax-timing option by using derivatives. It is the first study to conclude that a motive for firms to use derivatives is to exploit the tax-timing option.

Keywords: Financial markets; Taxation; Financial economics; Financial institutions and services; Financial markets and institutions; Tax-timing option; Derivatives; Tax aggressiveness; Unrealized gains; Realized losses; Firm market value; G23; G32; K34 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:6:y:2014:i:4:p:376-390

DOI: 10.1108/JFEP-02-2014-0013

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