Tax Avoidance and Ex Ante Cost of Capital

28 Pages Posted: 3 Aug 2017

See all articles by Kirsten A. Cook

Kirsten A. Cook

Texas Tech University - Area of Accounting

William J. Moser

Miami University

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: July/August 2017

Abstract

This study examines the association between tax avoidance and ex ante cost of equity capital. Based on prior research, we develop two proxies for investors’ expectations of tax avoidance and explore whether deviations from those expectations result in higher ex ante cost of equity capital. We find that the ex ante cost of equity capital increases with tax avoidance that is either below or above investor expectations and that the increase is larger for tax avoidance that exceeds investors’ expectations. We then examine whether firms that alter their future tax avoidance exhibit a lowering of their ex ante cost of equity capital and find that tax avoidance decreases (increases) from the prior year for firms that were above (below) investors’ expectations in the prior year. These results are consistent with the trade‐off suggested by the Scholes and Wolfson framework and reinforce the notion that balancing tax benefits and non‐tax costs is an important feature of firms’ tax planning.

Keywords: cost of capital, tax avoidance, book‐tax differences, effective tax rates

Suggested Citation

Cook, Kirsten A. and Moser, William J. and Omer, Thomas C., Tax Avoidance and Ex Ante Cost of Capital (July/August 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 7-8, pp. 1109-1136, 2017. Available at SSRN: https://ssrn.com/abstract=3012857 or http://dx.doi.org/10.1111/jbfa.12258

Kirsten A. Cook (Contact Author)

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

William J. Moser

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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