The Impact of Profitability Pressure and Capital Market Valuation on Tax Haven Engagement

Abstract

We investigate three key research questions related to firms’ engagement in tax haven activities: (1) the relationship between firm profitability pressures and tax haven involvement, (2) how the capital markets price tax haven activities as potential risks, and (3) whether firm profitability pressures moderate the relationship between tax haven involvement and capital market risk perceptions. Analyzing data from 1995 to 2020, we find that firms facing profitability pressure are more likely to engage in tax haven activities. Additionally, tax haven involvement is typically viewed negatively by capital markets, signaling heightened information risk and agency costs. However, under profitability pressures, capital markets assess tax haven activities less unfavorably. These findings highlight the need to better understand the drivers of aggressive tax avoidance strategies.

Keywords: Tax avoidance, Information risk, Market value, Tax Haven

JEL Classification: G10, G30, H26, L21, M41