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http://ssrn.com/abstract=2347330
 
 

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Firm Valuation and the Uncertainty of Future Tax Avoidance


Martin Jacob


WHU - Otto Beisheim School of Management

Harm H. Schütt


WHU - Otto Beisheim School of Management

February 4, 2014

FAccT Center Working Paper Nr. 13/2013

Abstract:     
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, H25

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Date posted: October 30, 2013 ; Last revised: February 4, 2014

Suggested Citation

Jacob, Martin and Schütt, Harm H., Firm Valuation and the Uncertainty of Future Tax Avoidance (February 4, 2014). FAccT Center Working Paper Nr. 13/2013. Available at SSRN: http://ssrn.com/abstract=2347330 or http://dx.doi.org/10.2139/ssrn.2347330

Contact Information

Martin Jacob (Contact Author)
WHU - Otto Beisheim School of Management ( email )
Burgplatz 2
D-56179 Vallendar, 56179
Germany
HOME PAGE: http://www.whu.edu/steuer
Harm H. Schütt
WHU - Otto Beisheim School of Management ( email )
Burgplatz 2
Vallendar, 56179
Germany
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