Corporate Tax Avoidance and Firm Value: Evidence from Brazil

Abstract

We investigate the relationship between corporate tax avoidance and firm value in Brazil. Although one might expect that tax avoidance activities result in generation of shareholder value, Desai and Dharmapala (2009a) showed this is not always the case. Implicit agency costs, whose existence was recently detected by the literature, may exceed the benefits of tax savings, causing destruction of shareholder value instead. To check what happens in Brazil, we conduct a regression analysis of panel data comprising 310 publicly traded firms in years 2007 to 2012, summing up 1,432 firm-year observations. We adopt BTD, controlled for total accruals, as proxy for tax avoidance and Tobin’s q as proxy for firm value. Our results show that tax avoidance and firm value are negatively related in Brazil. We also evaluate the effect of corporate governance, finding evidence that it plays an important role in mitigating value destruction, as well as the effects of family management and ownership concentration.