Tax Avoidance and Equity Pricing: The Importance of Countries’ Legal Institutions and Disclosure Regulations

66 Pages Posted: 1 Sep 2021 Last revised: 6 May 2024

See all articles by Ruiyuan (Ryan) Chen

Ruiyuan (Ryan) Chen

West Virginia University

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Jeffrey Pittman

Memorial University ; Virginia Tech

Yang Yang

University of Montevallo

Date Written: August 22, 2022

Abstract

In cross-country research, we examine the importance of tax avoidance to equity pricing, and the role that institutional infrastructure may play in shaping this link. Analyzing a sample of firms from 58 non-U.S. countries, we report strong, robust evidence that equity financing costs rise when firms take more aggressive tax positions. Additional analysis implies that stricter investor protection institutions and sound disclosure regulation alleviate investors’ concerns about insider diversion, moderating the positive impact of tax avoidance on equity pricing. Collectively, our results suggest that investors recognize the complementarity between insider diversion and tax avoidance in less protective environments.

Keywords: Tax avoidance, cost of equity capital, managerial diversion, institutional environments

JEL Classification: G18, G21, G32, G34, H26

Suggested Citation

Chen, Ruiyuan and El Ghoul, Sadok and Guedhami, Omrane and Pittman, Jeffrey A. and Yang, Yang, Tax Avoidance and Equity Pricing: The Importance of Countries’ Legal Institutions and Disclosure Regulations (August 22, 2022). Available at SSRN: https://ssrn.com/abstract=3914068 or http://dx.doi.org/10.2139/ssrn.3914068

Ruiyuan Chen

West Virginia University ( email )

1601 University Avenue
Morgantown, WV 26505
United States

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Jeffrey A. Pittman

Memorial University ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Virginia Tech ( email )

United States

Yang Yang

University of Montevallo ( email )

Montevallo, AL 35115
United States

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