Do Investors Differentially Value Tax Avoidance of Income Mobile Firms?
42 Pages Posted: 10 Jul 2012
Date Written: July 9, 2012
We provide evidence that tax avoidance is positively associated with firm value, and that the association is greater for income mobile firms. We classify firms with the ability to tax-efficiently structure global operations as "income mobile." The tax minimization strategies available to these firms are, on average, more long-term and sustainable than those available to other firms. As such, we predict and find that tax avoidance is more positively associated with firm value for income mobile firms. These findings suggest that investors recognize and value long-term, sustainable tax avoidance. We also investigate whether this association weakens after 2006, a period characterized by increased worldwide scrutiny and enhanced financial statement disclosures of tax avoidance. We find that income mobile tax avoidance is less positively valued after 2006. This suggests that investors recognize the increased risk associated with income mobile tax planning in recent years.
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