Tax avoidance, investor protection, and investment inefficiency: An international evidence

R. Benkraiem (), S. Gaaya and F. Lakhal
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R. Benkraiem: Audencia Business School

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Abstract: This paper provides new evidence on the relationship between corporate tax avoidance, and investment inefficiency. Based on a sample of 82,487 firm-year observations across 38 countries, we find that tax avoidance is positively associated with inefficient investments. Particularly, the positive effect of corporate tax avoidance is due to the underinvestment problem suggesting that firms engaging in tax saving activities suffer from exacerbated information asymmetry issues leading them to underinvest. More importantly, the results show that the relationship between tax avoidance and investment inefficiency is more prevalent during crisis periods, suggesting that in periods of economic shortfalls, the investment behavior is altered due to high external financing cost. We also find that the relation between tax avoidance activities and investment inefficiency is less prevalent in countries with strong investor protection. These findings are robust to alternative samples, measures of tax avoidance, investor protection and to endogeneity issues.

Keywords: Tax avoidance; investor protection; investment inefficiency (search for similar items in EconPapers)
Date: 2024-08
Note: View the original document on HAL open archive server: https://hal.science/hal-04679540
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Published in Research in International Business and Finance, 2024, 69, ⟨10.1016/j.ribaf.2024.102258⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04679540

DOI: 10.1016/j.ribaf.2024.102258

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