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Corporate Tax Avoidance and Firm Value

27 Pages Posted: 28 Jun 2006 Last revised: 17 Jan 2011

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: January 2, 2011

Abstract

Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance that yield distinct predictions on the valuation of corporate tax avoidance. Unexplained differences between income reported to capital markets and to tax authorities are used to proxy for tax avoidance activity. These "book-tax" gaps are shown to be larger when firms are alleged to be involved in tax shelters. OLS estimates indicate that the average effect of tax avoidance on firm value is not significantly different from zero, but is positive for well-governed firms as predicted by an agency perspective on corporate tax avoidance. An exogenous change in tax regulations that affected the ability of some firms to avoid taxes is used to construct instruments for tax avoidance activity. The IV estimates yield larger overall effects and reinforce the basic result that higher quality firm governance leads to a larger effect of tax avoidance on firm value. The results are robust to a wide variety of tests for alternative explanations. Taken together, the results suggest 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.

Keywords: Taxes, tax avoidance, tax shelters, book-tax gaps, governance, firm value

JEL Classification: G32, H25, H26, K34

Suggested Citation

Dharmapala, Dhammika and Desai, Mihir A., Corporate Tax Avoidance and Firm Value (January 2, 2011). 1st Annual Conference on Empirical Legal Studies Paper. Available at SSRN: https://ssrn.com/abstract=912289 or http://dx.doi.org/10.2139/ssrn.912289

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

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

Mihir A. Desai

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

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

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