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Do Tax Risk and Tax Avoidance Affect Firm Value?

Do Tax Risk and Tax Avoidance Affect Firm Value?

Jenn-Shyong Kuo, Department of Accountancy, National Taipei University
Chen-Ying Ko, National Taxation Bureau of Taipei, Ministry of Finance
Da-Kai Wu, Department of Accounting, Feng Chia University
Yi-Cheng Ho, Department of Public Finance, National Chengchi University

1. Purpose

This paper examines the impact that tax risk and tax avoidance, both individually and
jointly, have on firm value. Greater volatility in tax burdens poses challenges for investors
in predicting future tax expenses. Given that tax expenses significantly impact a company’s
earnings and cash flow, heightened tax burden volatility indicates that investors may find it

challenging to anticipate future earnings and cash flows, resulting in a negative correlation
between perceived tax risk and firm value.
In terms of tax avoidance, most studies suggest it has a positive impact as it serves
to reduce a company’s tax burden. However, some literature posits that failing to pay a

reasonable amount of taxes not only tarnishes a company’s reputation but also diminishes
its overall value. Furthermore, when considering the benefits of tax avoidance, investors
tend to prefer tax planning strategies associated with lower tax risk. Consequently, this
study proposes that there exists an interplay between tax risk and tax avoidance, where tax

avoidance strategies with higher associated risks tend to be less favorably evaluated by
investors.
On the other hand, prior research has primarily focused on the impact of tax avoidance
on firm value while largely overlooking the effects of tax risk and the interaction between

tax avoidance and tax risk. Moreover, despite increasing research on tax risk, discussions
of its relationship with firm value remain scarce, especially in Taiwan, where there is a
lack of related studies. Additionally, studies examining the relationship between tax risk and
firm value typically rely on U.S. data and do not take into account the potential influence

of changes in tax policy. This study aims to bridge these gaps in the existing literature.
We then posit the following three hypotheses:

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