The Effect of Corporate Tax Avoidance on the Cost of Equity

Posted: 23 Mar 2013 Last revised: 25 Feb 2016

See all articles by Beng Wee Goh

Beng Wee Goh

Singapore Management University - School of Accountancy

Jimmy Lee

Singapore Management University - School of Accountancy

Chee Yeow Lim

Singapore Management University - School of Accountancy

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2013

Abstract

While prior studies have examined how investors perceive extreme forms of tax avoidance behavior such as tax sheltering and uncertain tax position (e.g., Hanlon and Slemrod 2009; Wilson 2009; Koester 2011; Hutchens and Rego 2012), there is little evidence on how investors perceive less extreme forms of tax avoidance. This study fills this void by examining the relation between firm’s cost of equity and corporate tax avoidance using three measures that capture less extreme forms of corporate tax avoidance: book-tax differences, permanent book-tax differences, and long-run cash effective tax rates. We find that less aggressive forms of corporate tax avoidance significantly reduces a firm’s cost of equity. Further analyses reveal that this effect is stronger for (i) firms with better outside monitoring, (ii) firms that likely realize higher marginal benefits from tax savings, and (iii) firms with better information quality. Our study presents large-sample results on how investors perceive less aggressive corporate tax avoidance and shows that tax planning is a value-enhancing activity for shareholders.

Keywords: tax avoidance, tax planning, cost of equity

JEL Classification: G32, H26, M41

Suggested Citation

Goh, Beng Wee and Lee, Jimmy and Lim, Chee Yeow and Shevlin, Terry J. and Shevlin, Terry J., The Effect of Corporate Tax Avoidance on the Cost of Equity (March 18, 2013). Singapore Management University School of Accountancy Research Paper No. 2014-11, Available at SSRN: https://ssrn.com/abstract=2237742 or http://dx.doi.org/10.2139/ssrn.2237742

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Jimmy Lee (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6808 5234 (Phone)

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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