Tax Avoidance, Firm Value, and Comparability

Abstract

The purpose of this study is to examine whether financial reporting comparability affects the relation between tax avoidance and firm value. There are two conflicting views on the relation between tax avoidance and firm value. One is the traditional perspective that views tax avoidance as value-enhancing transfer of corporate resources from the government to the shareholders. The other is an agency theory perspective that views tax avoidance as an effective monitoring vehicle for managerial private interests, and thus the effect of tax avoidance on firm value varies depending on the size of non-tax costs of tax avoidance. Using 3,123 firm-year observations listed on Korea Exchange over 2006~2015, we find that the negative relationship between tax avoidance and firm value weakens as the level of comparability increases. Investors place a price discount on tax avoidance on average because the increase in non-tax costs due to tax avoidance is more severe than tax savings itself. However, as comparability increases, the decline in corporate value is partially alleviated due to a decrease in non-tax costs of tax avoidance. In short, financial reporting comparability has a positive impact on the relationship between tax avoidance and firm value. These results can be seen in both accounting-based and market-based comparability. This study contributes to the literature on the relationship between tax avoidance and firm value by focusing on the effect of comparability. As the comparability among firms enhances, it will increase market participants'' understanding of the economic consequences of tax avoidance. Further, this study provides evidence of the role of Peterson, Schmardebeck, and Wilks''s (2015) text-based accounting consistency beyond De Franco, Kothari, and Verdi''s (2011) market-based comparability in explaining the relationship between tax avoidance and firm value. measure, it has limitation in that it is highly influenced by stock returns.1) In contrast,