Corporate Tax Avoidance and Firm Value

Mihir A. Desai and Dhammika Dharmapala

No 11241, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do investors value managerial actions designed solely to minimize corporate tax obligations? Using a framework in which managers' tax sheltering decisions are related to their ability to divert value, this paper predicts that the effect of tax avoidance on firm value should vary systematically with the strength of firm governance institutions. The empirical results indicate that the average effect of tax avoidance on firm value is not significantly different from zero; however, the effect is positive for well-governed firms as predicted. Coefficient estimates are consistent with an expected life of five years for the devices that generate these tax savings for well-governed firms. Alternative explanations for the dependence of the valuation of the tax avoidance measure on firm governance do not appear to be consistent with the empirical results. The findings indicate that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete, given the agency problems characterizing shareholder-manager relations.

JEL-codes: G32 H25 H26 K34 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-acc, nep-fin, nep-law and nep-pub
Note: CF PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Desai, Mihir, and D. Dharmapala. "Corporate Tax Avoidance and Firm Value." The Review of Economics and Statistics. August 2009, Vol. 91, No. 3, Pages 537-546

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