The Effect of Corporate Tax Avoidance on the Cost of Equity

Posted: 25 Feb 2016

See all articles by Beng Wee Goh

Beng Wee Goh

Singapore Management University - School of Accountancy

Jimmy Lee

Singapore Management University - School of Accountancy

Chee Yeow Lim

Singapore Management University - School of Accountancy

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Multiple version iconThere are 2 versions of this paper

Date Written: February 25, 2016

Abstract

Based on Lambert, Leuz, and Verrecchia (2007)’s derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm’s cost of equity capital. Using three broad measures of tax avoidance — book-tax differences, permanent book-tax differences, and long-run cash effective tax rates — to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance.

Keywords: Tax avoidance, tax planning, cost of equity

JEL Classification: G32, H26, M41

Suggested Citation

Goh, Beng Wee and Lee, Jimmy and Lim, Chee Yeow and Shevlin, Terry J. and Shevlin, Terry J., The Effect of Corporate Tax Avoidance on the Cost of Equity (February 25, 2016). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2737784

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Jimmy Lee

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6808 5234 (Phone)

Chee Yeow Lim

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
2,133
PlumX Metrics