The impact of corporate long-term tax avoidance and tax uncertainty on cost of equity capital: evidence from Korea

Abstract

This study aims to investigate the impact of Korean firms' long-run tax avoidance on the cost of equity capital. To the end, we examine whether long-term tax avoidance and tax uncertainty are associated with the cost of equity capital. According to the implicit tax theory, tax-favoured investments can decrease the firm's expected operating income. Besides, implicit taxes generated by tax credit can have distributional effects: the tax benefits shift to other stakeholders than the shareholders of the firms opting for the legitimate tax avoidance. We find results that, controlling for firm's various risk factors, Korean firms' long-run tax avoidance is positively associated with higher cost of equity capital. The results suggest that the unfavourable implicit tax effects of long-run tax avoidance dominate the favourable tax saving effects for the part of shareholders.