• editor.aipublications@gmail.com
  • Track Your Paper
  • Contact Us
  • ISSN: 2456-7817

International Journal Of Engineering, Business And Management(IJEBM)

Tax avoidance and firm value: The role of legal protection for investor rights

Kuo Nan-Ting


International Journal of Engineering, Business And Management(IJEBM), Vol-10,Issue-2, April - June 2026, Pages 35-51 , 10.22161/ijebm.10.2.6

Download | Downloads : 1 | Total View : 36

Article Info: Received: 26 Apr 2026; Received in revised form: 23 May 2026; Accepted: 27 May 2026; Available online: 01 Jun 2026

Cite this Article: APA | ACM | Chicago | Harvard | IEEE | MLA | Vancouver | Bibtex

Share

Our paper explores how corporate governance affects the valuation of tax avoidance. We argue that better governance enhances investor valuation of tax avoidance primarily through deterring managers from misallocating tax savings to pursue their private benefits. By exposing cross-country data, we find that investors on average negatively value corporate tax avoidance and such negative valuation is attenuated in countries with strong protection for investor rights. Our findings suggest that the primary agency issue concerning tax avoidance is the misallocation of tax savings instead of managers exploiting tax avoidance to shield their rent extraction.

corporate governance, firm value, tax avoidance.

[1] Desai, M. and D. Dharmapala (2009).Corporate tax avoidance and firm value.Review of Economics and Statistics 91: 537–546.
[2] Dhaliwal, D., S. Huang, W. Moser, and R. Pereira (2011). Corporate Tax Avoidance and the Level and Valuation of Firm Cash Holdings.Working paper, University of Arizona, Arkansas and Missouri.
[3] Wang, X. (2010). Tax avoidance, corporate transparency, and firm value.Working paper, University of Texas.
[4] Blaylock, B. (2011).Do managers extract economically significant rents through tax aggressive transactions? Working paper, Oklahoma State University.
[5] Mironov, M. (2013).Taxes, theft, and firm performance. Journal of Finance 68: 1441–1472.
[6] Christie, W., and V. Nanda (1994). Free cash flow, shareholder value, and the undistributed profits tax of 1936 and 1937.Journal of Finance 49: 1727–1754.
[7] Pinkowitz, L., R. Stulz, and R. Williamson (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A cross-country analysis.Journal of Finance 61: 2725–2751.
[8] Dittmar, A., J. Mahrt-Smith, and H. Servaes (2003). International corporate governance and corporate cash holdings.Journal of Financial and Quantitative Analysis 38: 111–133.
[9] Dittmar, A. and J. Mahrt-Smith (2007). Corporate governance and the value of cash.Journal of Financial Economics 83: 599–634.
[10] Harford, J., S. Mansi, and W. Maxwell (2008). Corporate Governance and Firm Cash Holdings in the US.Journal of Financial Economics 87:535-555.
[11] Iskandar-Datta, M. and Y. Jia (2013).Investor protection and corporate cash holdings around the world: new evidence.Review of Quantitative Finance and Accounting 43: 245–273.
[12] La Porta R, F. Lo´pez-de-Silanes, A. Shleifer, and R. W. Vishny (1998). Law and finance.Journal of Political Economy 106:1113–1155.
[13] La Porta R, F. Lo´pez-de-Silanes, A. Shleifer, and R. W. Vishny (2000).Investor protection and corporate governance.Journal of Financial Economics 58:3–27.
[14] La Porta R, F. Lo´pez-de-Silanes, A. Shleifer, and R. W. Vishny (2000b).Agency problems and dividend policies around the world.Journal of Finance 55: 1–33.
[15] Desai, M. and D. Dharmapala (2008).Tax and Corporate Governance: an Economic Approach.In Schon, W., (Ed.). Tax and Corporate Governance. Berlin: Springer-Verlag, 13-30.
[16] Wilson, R. (2009).An examination of corporate tax shelter participants.The Accounting Review 84: 969-999.
[17] Cloyd, B., L. Mills, and C. Weaver (2003).Firm valuation effects of expatriation of U.S. corporations to tax-haven countries.The Journal of American Taxation Association (Supplement): 87–109.
[18] Doidge, C., G. A. Karolyi, and R. M. Stulz (2007). Why do countries matter so much for corporate governance?Journal of Financial Economics 86: 1-39.
[19] Aggarwal, R., I. Erel, R.M. Stulz, and R. Williamson (2009). Differences in governance practices between US and foreign firms: measurement, causes, and consequences.Review of Financial Studies 22: 3171–3209.
[20] Mills, L. F. (1998). Book-tax differences and Internal Revenue Service adjustments.Journal of Accounting Research 36: 343-356.
[21] Manzon, G. B. and G. A. Plesko (2002).The relation between financial and tax reporting measures of income.Tax Law Review 55: 175-214.
[22] Goncharov, I. (2009). Does reporting timeliness affect book-tax difference? Working paper, University of Amsterdam.
[23] Shevlin, T. (2002).Commentary: corporate tax shelters and book-tax differences. Tax Law Review 55, 427-443.
[24] Dyck, A., and L. Zingales (2004). Private benefits of control: An international comparison.Journal of Finance 59: 537-600.
[25] Atwood, T., M. Drake, J. Myers, and L. Myers (2012). Home country tax system characteristics and corporate tax avoidance: International evidence.The Accounting Review 87: 1831-1860.
[26] Haw, I., B. Hu, L. Hwang, and W. Wu (2004). Ultimate ownership, income management, and legal and extra-legal institutions. Journal of Accounting Research 42: 423-462.
[27] Edwards, A., C. Schwab, and T. Shevlin (2012). Financial constraints and the incentive for tax planning. Working Paper, University of California-Irvine.
[28] Almeida, H., M. Campello, and M. S. Weisbach (2004). The cash flow sensitivity of cash. Journal of Finance 59: 1777–2084.
[29] Kim, C., D. Mauer, and A. Sherman (1998). The determinants of corporate liquidity: theory and evidence. Journal of Financial and Quantitative Analysis 33: 335-359.
[30] Opler, T., L. Pinkowitz, R. Stulz, and R. Williamson. (1999). The determinants and implications of cash holdings. Journal of Financial Economics 52: 3-46.
[31] Harford, J. (1999). Corporate cash reserves and acquisitions. Journal of Finance 54: 1969-1997.
[32] Fama, E.F. and K. French (1998). Taxes, financing decisions, and firm value. Journal of Finance 53: 819–843.
[33] Alzahrani, M. and M. Lasfer (2012). Investor protection, taxation, and dividends. Journal of Banking and Finance 18:745-762.
[34] Jensen, M. C. (1986). Agency costs and free cash flow, corporate finance and takeovers. American Economic Review 76: 659–665.