Does Tax Risk Affect Investor Valuation of Tax Avoidance?

Posted: 3 Jan 2014 Last revised: 1 Mar 2017

Katharine D. Drake

University of Arizona - Department of Accounting

Stephen J. Lusch

University of Kansas - Accounting and Information Systems Area

James Stekelberg

Colorado State University, Fort Collins - Department of Accounting

Date Written: February 1, 2017

Abstract

We examine how investors value tax avoidance (measured as the level of cash ETRs) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

Keywords: corporate tax avoidance, tax risk, uncertain tax positions, firm valuation

Suggested Citation

Drake, Katharine D. and Lusch, Stephen J. and Stekelberg, James, Does Tax Risk Affect Investor Valuation of Tax Avoidance? (February 1, 2017). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2374016 or http://dx.doi.org/10.2139/ssrn.2374016

Katharine D. Drake

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Stephen J. Lusch

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

James Stekelberg (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

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