The Value Implications of Tax Avoidance Across Countries

Abstract

Motivated by two competing views on the value implications of tax avoidance, this study examines how investors perceive tax-avoidance behavior in an international setting. Using a sample of 42,107 firm-year observations from 46 countries over the 2001-2010 period, I find that the average relation between tax avoidance and firm value (as measured by Tobin’s Q) is positive and significant. This relation, however, is mitigated in countries with little control over self-dealing, weak corporate governance, and high levels of corruption. While tax avoidance is more value enhancing in developed and common law countries, I find no evidence that a country’s adoption of International Financial Reporting Standards (IFRS), book-tax conformity, or aggregate earnings quality is associated with investor perceptions of tax avoidance. Overall, the results suggest that tax avoidance creates value for shareholders, and that the value of tax avoidance is driven by the heterogeneous agency costs associated with different institutions.

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