Tax Avoidance, Income Diversion, and Shareholder Value: Evidence from a Quasi-Natural Experiment
56 Pages Posted: 15 Mar 2017 Last revised: 16 Oct 2017
Date Written: July 2017
I exploit a quasi-natural experiment provided by a tax reform in Korea to examine the effect of corporate tax avoidance on firm value, and the interaction between the corporate tax system and corporate governance. First, I find that investors perceive tax avoidance to be, on average, a value enhancing activity. Second, the market response to the tax reform is consistent both with the notion that higher tax rates can worsen corporate governance outcomes by increasing the return from income diversion, and that stricter tax enforcement can actually increase firm value. The results are robust to alternative specifications and explanations.
Keywords: Tax Avoidance, Tax Enforcement, Corporate Governance, Corporate Tax
JEL Classification: G14, G32, G34, G38, H26
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