Tax Avoidance, Corporate Transparency, and Firm Value

Abstract:     
Tax avoidance that reduces transfers from shareholders to the government is traditionally viewed as value enhancing to shareholders. The agency perspective of tax avoidance, however, suggests that opportunistic managers may exploit the obfuscatory nature of tax avoidance to mask rent extraction. To shed light on these conflicting views, I use a self-constructed opacity index and multiple measures of tax avoidance to examine how corporate transparency relates to tax avoidance. I find that transparent firms, which potentially have less severe agency problems, avoid more tax relative to their opaque counterparts. This result suggests that managers engage in tax avoidance transactions mainly to enhance shareholder wealth. Further, I find that investors place a value premium on tax avoidance, but the premium decreases with corporate opacity. This is consistent with the notion that corporate transparency facilitates the monitoring of managerial actions and thus alleviates outside investors’ concern about the hidden agency costs associated with tax avoidance.

Number of Pages in PDF File: 62

Keywords: Tax avoidance, corporate transparency, firm value, agency costs

working papers series