Noise and Taxes: The Effect of Industry Noise on the Value of Tax Savings

Abstract

We examine how variability in tax outcomes within industries (which we refer to as industry noise) affects the marginal value of cash tax savings. We predict and find that industry noise lowers shareholders' value on an additional dollar of tax savings. We also find that the negative effect of industry noise on the marginal value of tax savings is more pronounced when the focal firm's tax outcomes are more volatile or less effective. Finally, we observe that the negative effect of industry noise on the marginal value of cash tax savings is stronger for firms with greater potential agency conflicts between managers and shareholders. Overall, our results reveal that industry noise directly influences investor valuation of tax savings.