Firm Valuation and the Uncertainty of Future Tax Avoidance
WHU - Otto Beisheim School of Management
Harm H. Schütt
University of California, Berkeley - Haas School of Business
February 4, 2014
FAccT Center Working Paper Nr. 13/2013
The paper studies the effect of uncertainty in tax avoidance on firm value. We first show in a clean surplus valuation model that expected tax rates interact with expectations about future profitability. This paper builds and tests a valuation framework that incorporates two outcome dimensions of corporate tax avoidance strategies: the stability and the level of expected tax rates. We develop a tax planning score that captures these two dimensions. The measure improves the prediction of future tax avoidance. We finally show that the tax planning score strengthens the effect of pre-tax earnings on firm value. Pre-tax earnings have a stronger effect on firm value for firms with effective and persistent tax planning. Firms with poor tax planning or volatile effective tax rates receive a discount on their earnings.
Number of Pages in PDF File: 46
Keywords: firm valuation, tax avoidance, tax uncertainty
JEL Classification: M41, G12, H25working papers series
Date posted: October 30, 2013 ; Last revised: February 4, 2014
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