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Tax Avoidance and Future Profitability

54 Pages Posted: 3 Mar 2013  

Sharon P. Katz

Columbia Business School - Accounting, Business Law & Taxation

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Andrew Schmidt

North Carolina State University

Date Written: March 1, 2013

Abstract

Do firm managers invest the savings from tax avoidance in positive net present value projects that enhance future profitability or divert them towards perquisite consumption, rent extraction, and value destroying projects? We indirectly investigate this question by testing whether tax avoidance moderates the association between current and future profitability. Consistent with the negative implications of tax avoidance (e.g. rent extraction) we document that, on average, the main components of current profitability: margins, utilization of assets and operating liability leverage, result in lower future profitability for tax aggressive firms as compared to firms that are not tax aggressive. Further, the negative effect of lower margins is more robust and persistent than the impact of inefficient asset utilization and operating liability leverage. These results persist in various contexts that mitigate or exacerbate rent extraction, such as the existence of foreign operations, better governance structure, more transparency, industry leadership position, and across corporate life cycle stages.

Keywords: Tax Avoidance, Profitability, DuPont Analysis

JEL Classification: H25, H26, M41, G31, G34

Suggested Citation

Katz, Sharon P. and Khan, Urooj and Schmidt, Andrew, Tax Avoidance and Future Profitability (March 1, 2013). Columbia Business School Research Paper No. 13-10. Available at SSRN: https://ssrn.com/abstract=2227149 or http://dx.doi.org/10.2139/ssrn.2227149

Sharon P. Katz

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Andrew P. Schmidt (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

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