Conclusion
In this study, we examine how investors value corporate tax avoidance and tax risk, and how these constructs interact to influence firm value. While we find that investors positively value tax avoidance and negatively value tax risk, we believe that our primary finding and contribution to the literature is that tax risk moderates the positive association between tax avoidance and firm value. That is, our results suggest that investor valuation of tax avoidance is higher when the tax avoidance is less risky. Our results are robust to using GAAP ETR-based measures of tax avoidance and tax risk, and a battery of alternative specifications including controlling for idiosyncratic and systematic risk and the cost of equity capital. We also find that contemporaneous measures of tax avoidance and tax risk provide insight into firms’ future tax cash flows. Finally, we find that in the post-FIN 48 period, UTB disclosures supplement information about tax avoidance and tax risk measured using cash ETRs, but the moderating effect of tax risk on investor valuation of tax avoidance continues to hold.
As with any empirical study, our findings are subject to a number of caveats. Most notably, the tax risk literature is still emerging and researchers have not yet reached a consensus on commonly accepted conceptual and/or operational definitions of tax risk. Although we focus on a notion of tax risk related to the dispersion of potential outcomes from tax avoidance, we note that others have taken a more holistic view of tax risk. As such, our conceptualization and operationalization of tax risk may only capture one dimension of a multifaceted construct. Although we would expect that other notions of tax risk are also negatively valued, these alternative operationalizations are outside the scope of this study.
