Stephen J. Lusch

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.

How Do Effective Tax Rates Vary Across Firms and Time? Insight from Effective Tax Rate Reconciliations

Abstract Effective tax rates (ETRs) are often used to compare tax avoidance across firms and time. Using firms detailed tax footnote data, we find that the effect of valuation allowances (VA) related to prior-period losses biases GAAP ETRs. This downward bias explains almost all of the downward trend in domestic firms ETRs over the last 20 years. We also find that VAs explain cross-sectional differences in ETRs for both domestic and multinational firms. We show this bias extends to cash ETRs and the Henry and Sansing (2018) tax avoidance measure. We develop a methodology for substantially reducing the bias in both time-series and cross-sectional analyses of cash and GAAP ETRs. Overall, our results suggest firms’ loss histories and GAAP rules influence inferences from tax avoidance proxies.