Corporate Tax Avoidance and Firm Value

32 Pages Posted: 12 May 2005 Last revised: 20 Sep 2010

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2005

Abstract

How do investors value managerial actions designed solely to minimize corporate tax obligations? Using a framework in which managers' tax sheltering decisions are related to their ability to divert value, this paper predicts that the effect of tax avoidance on firm value should vary systematically with the strength of firm governance institutions. The empirical results indicate that the average effect of tax avoidance on firm value is not significantly different from zero; however, the effect is positive for well-governed firms as predicted. Coefficient estimates are consistent with an expected life of five years for the devices that generate these tax savings for well-governed firms. Alternative explanations for the dependence of the valuation of the tax avoidance measure on firm governance do not appear to be consistent with the empirical results. The findings indicate that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete, given the agency problems characterizing shareholder-manager relations.

Suggested Citation

Dharmapala, Dhammika and Desai, Mihir A., Corporate Tax Avoidance and Firm Value (April 2005). NBER Working Paper No. w11241. Available at SSRN: https://ssrn.com/abstract=697166

Dhammika Dharmapala

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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