The Effect of Tax Avoidance on Firm Value—From the Perspective of Institutional Investor

Abstract

Though tax avoidance can reduce the expense of income tax and decrease the effective tax rate, it may not necessarily increase the firm value. This article shows that due to the agency problems, tax avoidance may become the shield for managers' rent-seeking behaviors, thus making the costs of tax avoidance exceed the gains it brings, which eventually leads to the negative effect on firm value. The interaction of institutional investors and tax avoidance can have a positive effect on firm value, which implies that institutional investors will restrain tax avoidance activities in order to stop the managers from expropriating the interests of the owners, play the role of corporate governance effectively, making tax avoidance activities increase the firm value indeed.