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Conforming Tax Avoidance and Firm Value ¹

David Tree ^a

Dilin Wang ^b

^{^a}Old Dominion University, USA

^{^b}Grand Valley State University, USA

Advances in Taxation

ISBN: 978-1-83549-585-8

Publication date: 20 June 2024

Abstract

This study explores the relationship between firm value and conforming tax avoidance (tax avoidance that does not create a book-tax difference). Tax avoidance provides firms with more cash and creates value. However, conforming tax avoidance has costs, such as lower book income, and these costs potentially lower firm value. As such, it is unclear whether conforming tax avoidance is positively or negatively correlated with firm value. We use a measure of conforming tax avoidance that was recently introduced in the literature, and bifurcate tax avoidance into conforming and nonconforming portions using a large sample. We present evidence that investors place a negative value on conforming tax avoidance for the average firm. We also examine the top quartile based on the measure of conforming tax avoidance and find a positive correlation between firm value and conforming tax avoidance for this subsample.

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Acknowledgements

Acknowledgments

We would like to thank Pete Frischmann, Jared Moore, Chris Akroyd, David Lewis, and Roger Graham for their comments and suggestions. We would also like to thank the Oregon State University 2017 Tax Seminar, Brad Mikus, Tonya Edinger, and Doudou Zhou for their valuable feedback on a prior version of this work.

Citation

Tree, D. and Wang, D. (2024), "Conforming Tax Avoidance and Firm Value ¹ ", Hasseldine, J. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 31), Emerald Publishing Limited, Leeds, pp. 77-103. https://doi.org/10.1108/S1058-749720240000031003

Publisher

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Emerald Publishing Limited