The Effect of Corporate Tax Avoidance on the Cost of Equity

ABSTRACT Based on Lambert, Leuz, and Verrecchia's (2007) derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance—book-tax differences, permanent book-tax differences, and long-run cash effective tax rates—to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance. JEL Classifications: G32; H26; M41.

Download Full-text

Mediators Linking Information Quality and the Cost of Equity Capital*

Asia-Pacific Journal of Financial Studies ◽

10.1111/ajfs.12299 ◽

2020 ◽

Vol 49 (3) ◽

pp. 410-437

Author(s):

Seong Mi Bae ◽

Hyoung‐Tae An ◽

Jong Dae Kim

Keyword(s):

Information Quality ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

The Cost

Download Full-text

The Cost of Equity Capital on Developing Equity Markets: Estimations for Selected Slovene Companies

South East European Journal of Economics and Business ◽

10.2478/v10033-010-0006-3 ◽

2010 ◽

Vol 5 (1) ◽

pp. 67-74

Author(s):

Igor Stubelj

Keyword(s):

Equity Markets ◽

Capital Budgeting ◽

Cash Flows ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Publicly Traded Companies ◽

And Performance ◽

The Cost ◽

Free Cash Flows

The Cost of Equity Capital on Developing Equity Markets: Estimations for Selected Slovene CompaniesThe article sheds light on the estimation of the cost of equity capital on a developing equity market. The cost of equity is important; it is crucial in capital budgeting decisions and performance evaluation. It determines the minimum yield the investors require on the invested capital and we use it as a discount rate to calculate the present value of the expected free cash flows to equity. The aim of this paper is to tackle the estimation of the cost of equity capital on developing markets with the example of estimation for ten Slovene publicly traded companies. The estimated cost of capital for the selected Slovene companies is between 9,7% and 13,7%.

Download Full-text

Corporate tax avoidance and cost of equity capital: international evidence

Applied Economics ◽

10.1080/00036846.2019.1706716 ◽

2019 ◽

Vol 52 (29) ◽

pp. 3123-3137

Author(s):

Hong Min Chun ◽

Grace Il-Joo Kang ◽

Sang Ho Lee ◽

Yong Keun Yoo

Keyword(s):

Tax Avoidance ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Corporate Tax ◽

International Evidence

Download Full-text

Methods of Bank Valuation in the Age of Globalization

MGIMO Review of International Relations ◽

10.24833/2071-8160-2015-3-42-173-183 ◽

2015 ◽

pp. 173-183

Author(s):

A. Karminsky ◽

E. Frolova

Keyword(s):

Weighted Average ◽

Cash Flows ◽

Equity Capital ◽

Residual Income ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Discounted Cash Flow ◽

Funding Liquidity ◽

Equity Value ◽

The Cost

This paper reviews the theory ofvalue-based management at the commercial bank and the main valuation methods in the age of globalization. The paper identifies five main factors that significantly influence valuation models selection and building: funding, liquidity, risks, exogenous factors and the capital cushion. It is shown that valuation models can be classified depending on underlying cash flows. Particular attention is paid to models based on potentially available cash flows (Discounted cash flow-oriented approaches, DCF) and models based on residual income flows (Residual income-oriented approaches). In addition, we consider an alternative approach based on comparison with same sector banks (based on multiples). For bank valuation equity discounted сash flow method is recommended (Equity DCF). Equity DCF values equity value of a bank directly by discounting cash flows to equity at the cost of equity (Capital Asset Pricing Model, CAPM), rather than at the weighted average cost of capital (WACC). For the purposes of operational management residual income-oriented approaches are recommended for use, because they are better aligned with the process of internal planning and forecasting in banks. For strategic management residual income-oriented methods most useful when expected cash flows are negative throughout the forecast period. Discounted сash flow-oriented approaches are preferable when expected cash flows have positive values and needs for models using is motivated by supporting the investment decisions. Proposed classification can be developed in interests of bank management tasks in the midterm in the age of globalization.

Download Full-text

Does Tax Risk Affect Investor Valuation of Tax Avoidance?

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x17692674 ◽

2017 ◽

Vol 34 (1) ◽

pp. 151-176 ◽

Cited By ~ 25

Author(s):

Katharine D. Drake ◽

Stephen J. Lusch ◽

James Stekelberg

Keyword(s):

Firm Value ◽

Tax Avoidance ◽

Cash Flows ◽

Equity Capital ◽

Tax Rates ◽

Cost Of Equity Capital ◽

Effective Tax Rates ◽

Fin 48 ◽

Tax Benefits ◽

The Cost

We examine how investors value tax avoidance (measured as the level of cash effective tax rates [ETRs]) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery of sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

Download Full-text