Tax Avoidance and Overinvestment: The Role of the Information Environment

Abstract

We investigate whether tax avoidance is associated with overinvestment and whether the firm’s information environment moderates this association. We find that tax avoidance is positively associated with overinvestment, and having a richer information environment mitigates this association. Our results are robust across multiple measures of tax avoidance and multiple proxies for the quality of the information environment. In addition, our results hold after propensity score matching, controlling for governance, partitioning on managerial ability, and in a change analysis. These findings highlight the important role of financial information in corporate investment behavior and enhance our understanding of the link between tax avoidance and agency costs.

Keywords: Overinvestment, Information Environment, Tax Avoidance

JEL Classification: E22, G31, M41, O16