Industry Tax Planning and Stock Returns

55 Pages Posted: 9 May 2016 Last revised: 1 Jun 2018

See all articles by Shane Heitzman

Shane Heitzman

University of Southern California - Marshall School of Business

Maria Ogneva

University of Southern California - Marshall School of Business

Date Written: March 16, 2018

Abstract

We investigate whether industry tax planning affects a firm’s cost of capital by increasing its exposure to tax policy risk. We find evidence that equity returns increase with the propensity for tax planning in a firm’s industry. Consistent with a policy risk interpretation, the magnitude of the identified premium becomes stronger during periods of high Democratic influence over the White House and the United States Tax Court. This risk premium is imposed on all firms in the industry, even those that are less aggressive than their industry peers, which is consistent with the existence of an industry-wide externality. The industry-based risk premium coexists with a firm-specific risk discount associated with active tax planning strategies with low systematic risk. This individual firm effect, however, is dwarfed by the industry-based risk premium and is concentrated in industries that are less likely to attract scrutiny from the tax authority.

Keywords: Tax Planning, Tax Avoidance, Policy Risk, Asset Pricing

JEL Classification: G12, H25, H26, E62, G38, M40

Suggested Citation

Heitzman, Shane and Ogneva, Maria, Industry Tax Planning and Stock Returns (March 16, 2018). Available at SSRN: https://ssrn.com/abstract=2777040 or http://dx.doi.org/10.2139/ssrn.2777040

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Maria Ogneva

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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