Towards an Optimal Level of Tax Avoidance

• In Event: Ongoing Research Session I

Abstract

We extend research that investigates the relation between tax avoidance and ex ante cost of capital by providing evidence that investors perceive tax avoidance differently at different levels. We partition our sample according to three measures of tax avoidance (book-tax differences, permanent book-tax differences, and 5-year cash effective tax rate) and examine the associations between tax avoidance and ex ante cost of capital for the top quintile and the bottom four quintiles, respectively. Increasing tax avoidance from the minimum value to the 80th percentile results in lower ex ante cost of capital, suggesting that investors view the benefits of tax avoidance to exceed the costs at these relatively low levels. In contrast, increasing tax avoidance from the 80th percentile to the maximum value results in higher ex ante cost of capital, suggesting that investors view the costs of tax avoidance to outweigh the benefits at these relatively high levels.

Authors

• Kirsten Abram Cook, Texas Tech University

• William Moser, Miami University of Ohio

• Thomas C Omer, University of Nebraska-Lincoln