Tax Avoidance and Dupont Measures of Future Performance

41 Pages Posted: 22 Mar 2015

See all articles by Sharon P. Katz

Sharon P. Katz

INSEAD

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Andrew Schmidt

North Carolina State University

Date Written: March 20, 2015

Abstract

To date, there is mixed evidence on the implications of tax avoidance on firm value as measured by Tobin’s q or stock price reactions. The take-away from prior literature is that increased opportunities for rent extraction associated with tax avoidance (e.g., in low governance firms), might negatively affect the after-tax value of the firm. We revisit this topic by investigating the association between tax avoidance and firm fundamentals (leverage, profitability, and asset utilization), using DuPont analysis. We document that tax avoidance unambiguously lowers future pretax accounting rates of return (i.e., return on equity, return on net operating assets, and return on operating assets), largely due to inefficient utilization of operating assets and operating liabilities. These results also hold in different contexts that mitigate rent extraction, including when firms have foreign operations and good governance.

Keywords: Tax Avoidance, Financial Statement Analysis, DuPont Analysis

JEL Classification: D21, G30, H25, H26, M41

Suggested Citation

Katz, Sharon P. and Khan, Urooj and Schmidt, Andrew P., Tax Avoidance and Dupont Measures of Future Performance (March 20, 2015). Columbia Business School Research Paper No. 15-29. Available at SSRN: https://ssrn.com/abstract=2581577 or http://dx.doi.org/10.2139/ssrn.2581577

Sharon P. Katz

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

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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