Investor Valuation of Tax Avoidance and the Uncertainty of Tax Outcomes: Evidence from the Pre- and Post-FIN 48 Periods

• In Event: Valuation consequences of reporting quality
  In Paper Session: Valuation Consequences of Reporting Quality

Abstract

We examine whether investor valuation of tax avoidance is contingent upon the uncertainty of the firm’s tax outcomes. Additionally, we test whether the valuation of tax avoidance and tax uncertainty changes from the pre- to post-FIN 48 periods with the availability of new disclosures related to uncertain tax positions. Our results suggest that investors positively value tax avoidance; however, greater tax uncertainty moderates this relationship. Further, in the post-FIN 48 period we find that disclosures regarding uncertain tax positions are informative to investors and are generally used for valuation incremental to the information previously available about tax avoidance and tax uncertainty in the financial statements. The results of our study suggest that tax avoidance and the uncertainty of tax outcomes are not independent and should be considered jointly rather than in isolation.

Authors

• Katharine Diane Drake, The University of Arizona

• Stephen John Lusch, The University of Arizona

• James Stekelberg, The University of Arizona