Publication Type
Journal Article
Version
acceptedVersion
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
Citation
GOH, Beng Wee; LEE, Jimmy; LIM, Chee Yeow; and SHEVLIN, Terry J..
The Effect of Corporate Tax Avoidance on the Cost of Equity. (2016). Accounting Review. 91, (6), 1647-1670.
Available at: https://ink.library.smu.edu.sg/soa_research/1511
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2308/accr-51432