Journal
ACCOUNTING REVIEW
Volume 91, Issue 6, Pages 1647-1670Publisher
AMER ACCOUNTING ASSOC
DOI: 10.2308/accr-51432
Keywords
tax avoidance; tax planning; cost of equity
Categories
Funding
- School of Accountancy Research Center (SOAR) at Singapore Management University
- Paul Merage School of Business at the University of California, Irvine
Ask authors/readers for more resources
Based on Lambert, Leuz, and Verrecchia's (2007) derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance-book-tax differences, permanent book-tax differences, and long-run cash effective tax rates-to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available