Corporate Tax Avoidance and Cost of Equity Capital: The Case of Taiwan

Abstract

Using the data of Taiwan’s listed firms, this paper shows that the cost of equity capital is negatively associated with firms’ tax avoidance activities. This effect is stronger for firms that have better outside monitoring, greater growth opportunities, and higher information quality. These results suggest that the positive cash flow effect of corporate tax avoidance can reduce the cost of equity capital. In other words, investors require lower rates of return on equity for firms with more tax avoidance activities because they expect that tax avoidance can generate positive cash flows. Key words: Corporate tax avoidance, cost of equity, outside monitoring, growth opportunities, information quality