IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Corporate Tax Avoidance and Firm Value

  • Mihir A Desai

    (Harvard University and NBER)

  • Dhammika Dharmapala

    (University of Connecticut)

Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities. OLS estimates indicate that the effect of tax avoidance on firm value is a function of firm governance, as predicted by an agency perspective on corporate tax avoidance. Instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result, as do several robustness checks. The results suggest 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. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 91 (2009)
Issue (Month): 3 (August)
Pages: 537-546

in new window

Handle: RePEc:tpr:restat:v:91:y:2009:i:3:p:537-546
Contact details of provider: Web page:

Order Information: Web:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
  2. Bankman, Joseph, 2004. "The Tax Shelter Problem," National Tax Journal, National Tax Association, vol. 57(4), pages 925-36, December.
  3. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  4. Desai, Mihir A. & Dyck, Alexander & Zingales, Luigi, 2007. "Theft and taxes," Journal of Financial Economics, Elsevier, vol. 84(3), pages 591-623, June.
  5. Anand Mohan Goel & Anjan V. Thakor, 2004. "Why Do Firms Smooth Earnings?," Finance 0411021, EconWPA.
  6. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  7. Mihir A. Desai & James R. Hines Jr., 2002. "Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions," NBER Working Papers 9057, National Bureau of Economic Research, Inc.
  8. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association, vol. 57(4), pages 877-99, December.
  9. William M. Gentry & Deen Kemsley & Christopher J. Mayer, 2001. "Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts," NBER Working Papers 8486, National Bureau of Economic Research, Inc.
  10. Kong-Pin & C.Y. Cyrus Chu, 2005. "Internal Control versus External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 151-164, Spring.
  11. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
  12. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-75, April.
  13. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1986. "Management Ownership and Corporate Performance: An Empirical Analysis," NBER Working Papers 2055, National Bureau of Economic Research, Inc.
  14. Desai, Mihir A. & Dharmapala, Dhammika, 2006. "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, Elsevier, vol. 79(1), pages 145-179, January.
  15. Patrick Bolton & Jose Scheinkman & Wei Xiong, 2003. "Executive Compensation and Short-termist Behavior in Speculative Markets," NBER Working Papers 9722, National Bureau of Economic Research, Inc.
  16. Randall Morck & Fan Yang, 2001. "The Mysterious Growing Value of S&P 500 Membership," NBER Working Papers 8654, National Bureau of Economic Research, Inc.
  17. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  18. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
  19. James R. Hines Jr., 2002. "On the Timeliness of Tax Reform," NBER Working Papers 8909, National Bureau of Economic Research, Inc.
  20. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  21. John R. Graham & Mark H. Lang & Douglas A. Shackelford, 2002. "Employee Stock Options, Corporate Taxes and Debt Policy," NBER Working Papers 9289, National Bureau of Economic Research, Inc.
  22. Benjamin C. Ayers & Craig E. Lefanowicz & John R. Robinson, 2003. "Shareholder Taxes in Acquisition Premiums: The Effect of Capital Gains Taxation," Journal of Finance, American Finance Association, vol. 58(6), pages 2783-2801, December.
  23. Kong-Pin Chen & C.Y. Cyrus Chu, 2005. "Internal Control vs. External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 151-164, Winter.
  24. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
  25. Randall Morck, 2004. "How to Eliminate Pyramidal Business Groups - The Double Taxation of Inter-Corporate Dividends and Other Incisive Uses of Tax Policy," NBER Working Papers 10944, National Bureau of Economic Research, Inc.
  26. Eugene F. Fama & Kenneth R. French, . "Taxes, Financing Decisions, and Firm Value," CRSP working papers 334, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  27. Guhan Subramanian, 2004. "The Disappearing Delaware Effect," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 32-59, April.
  28. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  29. D'Souza, Julia & Jacob, John, 2000. "Why firms issue targeted stock," Journal of Financial Economics, Elsevier, vol. 56(3), pages 459-483, June.
  30. Crocker, Keith J. & Slemrod, Joel, 2005. "Corporate tax evasion with agency costs," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1593-1610, September.
  31. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tpr:restat:v:91:y:2009:i:3:p:537-546. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Pollock-Nelson)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.