James Stekelberg

Does Tax Risk Affect Investor Valuation of Tax Avoidance

We examine how investors value tax avoidance (measured as the level of cash 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. Results of tests in the post-FIN 48 period suggest that while disclosures of uncertain tax positions are informative to investors, they are generally associated with firm value incremental to (rather than as a substitute for) cash ETR-based measures of tax avoidance and tax risk. 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. 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.

The Effect of High Quality Information Technology on Corporate Tax Avoidance and Tax Risk

ABSTRACT We examine the effect of high-quality information technology (IT) on corporate tax outcomes. Using a measure of IT quality constructed from rankings in InformationWeek magazine, we find that firms with high-quality IT are able to achieve both lower and less volatile cash effective tax rates than are other firms. These results suggest that firms with high-quality IT are able to avoid more taxes while simultaneously incurring less tax risk compared to firms with lesser IT systems. We also perform mediation analyses to investigate the channels through which high-quality IT enables effective tax planning. Results of these tests suggest that the most important driver of our findings is timely, reliable information facilitated by high-quality IT. Our study contributes to both the IT and tax literatures by identifying and quantifying the returns to investments in IT in terms of more favorable corporate tax outcomes.