The Effect of Managerial Ability on the Market Valuation of Unrecognized Tax Benefits

Chunhao Xu, Xiangge Wang, Shiyou Li, Rachana Kalelkar and Lili Gai
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Chunhao Xu: University of Texas Permian Basin
Xiangge Wang: California State University
Shiyou Li: Texas A&M University-Commerce
Rachana Kalelkar: University of Houston-Victoria
Lili Gai: University of Texas Permian Basin

American Business Review, 2024, vol. 27, issue 1, 349-371

Abstract: This study examines the effect of managerial ability on the market valuation of unrecognized tax benefits (UTBs). While UTBs are generally associated with significant risks, we hypothesize that highly able managers can enhance the market valuation of the UTBs through their ability and efforts to report high-quality UTBs and retain the economic benefits of tax strategies. Consistent with our expectations, we find that managerial ability positively moderates the relationship between UTBs and firm values. Our additional analyses show that highly able executives can reduce firms’ future overall tax risk and tax settlements. Collectively, our findings suggest that the stock market values UTBs positively in firms managed by highly capable executives who can minimize tax risks while lowering tax payments.

Keywords: Managerial Ability; Market Valuation; Unrecognized Tax Benefits (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ambsrv:0107

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