Tax avoidance and firm value: does qualitative disclosure in the tax footnote matter?

Le Luo, Mark Shuai Ma, Thomas C. Omer, Hong Xie

Review of Accounting Studies · 2024 · Volume 29 · Issue 3

Abstract

This study examines whether qualitative disclosure in tax footnotes affects the market valuation of tax avoidance activities. We predict that more disclosures in tax footnotes mitigate investors’ concerns over the agency risk of managers engaging in potentially illegal tax avoidance and improve the transparency of firm performance, thus increasing firm valuation. Consistent with the prediction, we find that the market valuation of tax avoidance increases when firms’ tax footnotes disclose more qualitative information related to their tax avoidance activities. We provide several tests to show mechanisms underlying our main findings and mitigate concerns about alternative explanations. Overall, our study suggests that the tax-related disclosures in tax footnotes are useful for investors assessing the value of tax avoidance.

Keywords

Agency costs, Information asymmetry, Tax avoidance, Tax footnotes, Firm value.

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