| Abstract: |
How do investors value managerial actions designed solely to minimize
corporate tax obligations? Using a framework in which managers' tax sheltering
decisions are related to their ability to divert value, this paper predicts
that the effect of tax avoidance on firm value should vary systematically with
the strength of firm governance institutions. The empirical results indicate
that the average effect of tax avoidance on firm value is not significantly
different from zero; however, the effect is positive for well-governed firms
as predicted. Coefficient estimates are consistent with an expected life of
five years for the devices that generate these tax savings for well-governed
firms. Alternative explanations for the dependence of the valuation of the tax
avoidance measure on firm governance do not appear to be consistent with the
empirical results. The findings indicate that the simple view of corporate tax
avoidance as a transfer of resources from the state to shareholders is
incomplete, given the agency problems characterizing shareholder-manager
relations. |