Title

The Effect of Corporate Tax Avoidance on the Cost of Equity

Publication Type

Journal Article

Publication Date

11-2016

Abstract

Based on Lambert, Leuz, and Verrecchia (2007)'s derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance-book-tax differences, permanent book-tax differences, and long-run cash effective tax rates-to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance.

Keywords

Tax avoidance, tax planning, cost of equity

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Accounting Review

Volume

91

Issue

6

First Page

1647

Last Page

1670

ISSN

0001-4826

Identifier

10.2308/accr-51432

Publisher

American Accounting Association

Additional URL

http://doi.org/10.2308/accr-51432