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Firm valuation and the uncertainty of future tax avoidance

  • The paper studies the effect of uncertainty in firm-speciffic tax avoidance on firm value. We first show in a clean surplus valuation model that expectations about future profitability interact with corporate tax avoidance. Two dimensions of corporate tax avoidance strategies matter for valuation: uncertainty and level of expected future tax rates. We confirm the importance of level and uncertainty of tax avoidance for forecasts of future tax rates using a small sample of analyst tax rate forecasts. Consistent with the model and the implications from analyst forecasts, we derive a tax signal-to-noise ratio based on historical tax information. In our sample of 2,820 firms, we show empirically that this tax signal-to-noise ratio amplifies the effect of pre-tax earnings on firm value. Pre-tax earnings have a stronger effect on firm value for firms with effective and persistent tax avoidance. Firms with volatile effective tax rates receive a discount on their earnings.

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Metadaten
Author:Martin Jacob, Harm H. Schütt
URN:urn:nbn:de:hbz:992-opus4-6651
DOI:https://doi.org/10.2139/ssrn.2347330
Series (Serial Number):FAccT Center Working Paper Series (13/2013)
Publisher:WHU - Otto Beisheim School of Management
Place of publication:Vallendar
Document Type:Working Paper
Language:English
Date of Publication (online):2018/06/12
Date of first Publication:2013/10/30
Release Date:2018/06/12
Tag:Steuerunsicherheit; Steuervermeidung; Unternehmensbewertung
Business valuation; Tax avoidance; Tax uncertainty
Edition:January 19, 2015
Page Number:46
Institutes:WHU Centers / WHU Financial Accounting & Tax Center (FAccT Center)
JEL-Classification:G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates
H Public Economics / H2 Taxation, Subsidies, and Revenue / H25 Business Taxes and Subsidies
M Business Administration and Business Economics; Marketing; Accounting / M4 Accounting and Auditing / M41 Accounting
Licence (German):Copyright for this publication