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Does Tax Deferral Enhance Firm Value?

Benjamin C. Ayers

University of Georgia

Stacie Kelley Laplante

University of Wisconsin

Casey M. Schwab

University of Georgia

December 20, 2011

Recent research provides evidence that corporate tax departments and tax directors have incentives to reduce financial statement effective tax rates, but little or no incentive to reduce cash taxes paid. The lack of managerial incentives to reduce cash taxes paid provides a stark contrast to the benefits of tax deferral espoused by tax professionals and academics, raising the question: Does tax deferral actually enhance firm value? We examine whether the difference between financial statement tax expense and current taxes paid (i.e., current year tax deferral) is associated with a firm’s change in future profitability and market returns. We find positive associations between current year tax deferral and both the change in next period profitability and stock returns in months around the Form 10-K release date. We also find that these associations increase for firms with greater investment opportunities, financial constraints, and, to a lesser extent, strong corporate governance. These results suggest both profitability and market return benefits associated with tax deferral, consistent with tax deferral enhancing firm value.

Number of Pages in PDF File: 51

Keywords: Tax deferral, tax planning, firm value, future profitability, returns

JEL Classification: G38, H25, H32, M41

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Date posted: December 24, 2011  

Suggested Citation

Ayers, Benjamin C. and Laplante, Stacie Kelley and Schwab, Casey M., Does Tax Deferral Enhance Firm Value? (December 20, 2011). Available at SSRN: http://ssrn.com/abstract=1976606 or http://dx.doi.org/10.2139/ssrn.1976606

Contact Information

Benjamin C. Ayers (Contact Author)
University of Georgia ( email )
Athens, GA 30602
United States
706-542-3772 (Phone)
706-542-3630 (Fax)
Stacie Kelley Laplante
University of Wisconsin ( email )
975 University Avenue
Madison, WI 53706
United States
608-265-3494 (Phone)
608-265-3494 (Fax)
Casey M. Schwab
University of Georgia ( email )
Athens, GA 30602
United States
706-542-3596 (Phone)
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