Aggregate corporate tax avoidance and cost of capital

Stephanie A. Sikes () and Robert E. Verrecchia
Additional contact information
Stephanie A. Sikes: University of Illinois Chicago
Robert E. Verrecchia: University of Pennsylvania

Review of Accounting Studies, 2025, vol. 30, issue 3, No 16, 2868-2921

Abstract: Abstract We identify a pecuniary externality arising from corporate tax avoidance. Firms share risk with the government via taxation. The lower the tax rate applied to a firm’s earnings, the more risk its shareholders bear. As more firms avoid taxes, the variance of the market’s after-tax cash flow increases. Consequently, the covariance of a firm’s cash flow with the market cash flow and thereby its cost of capital increases. This occurs regardless of a firm’s tax avoidance. Consistent with our prediction, we find that firms’ implied cost of capital relates positively to aggregate corporate tax avoidance regardless of a firm’s level of tax avoidance. As we predict, the pecuniary externality is stronger for firms whose cash flow covaries more with the market cash flow and is driven by tax avoidance strategies that reduce a firm’s marginal tax rate (e.g., income shifting of U.S. multinationals) as opposed to reducing its tax base.

Keywords: Corporate tax avoidance; Cost of capital; Expected rate of return; Risk-sharing (search for similar items in EconPapers)
JEL-codes: G12 G18 G32 H25 H26 M41 (search for similar items in EconPapers)
Date: 2025
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-025-09879-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:30:y:2025:i:3:d:10.1007_s11142-025-09879-3

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-025-09879-3

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().