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Do Tax Risk and Tax Avoidance Affect Firm Value?

expenses (AD), intangible assets (INTAN), and depreciation expenses (DEPRE). IND and
YEAR denote industry and year fixed effects, respectively. Based on hypothesis 1, we
expect a negative association between tax risk and firm value.
To assess this hypothesis 2, we define tax avoidance as the five-year cash effective tax

rate (CETR5). We present the OLS regression model as follows:

TOBINSQ = β + β CETR5 + ρ CONTROL + IND +YEAR + ε , (2)
1
it
it
0
t
it
it
i
we expect a positive relationship between tax avoidance and firm value.
Hypothesis 3 posits that tax risk moderates the positive valuation of tax avoidance.
We interact tax risk and tax avoidance (SD_CETR5× CETR5) to examine whether tax risk

influences the effect of tax avoidance on firm value:

TOBINSQ = β + β SD_CETR5 + β CETR5 + β SD_CETR5 × CETR5 it
0
it
it
it
2
1
3
+ ρ CONTROL + IND + YEAR + ε , (3)
i
it
it
t
we expect the coefficient of SD_CETR5× CETR5 to be negative.
During the sample period, Taiwan has witnessed four major tax reforms, including
the introduction of the income basic tax in 2006, the corporate income tax cut in 2010, the
transition from a full imputation tax system to a partial imputation tax system beginning
in 2015, and the increase in the corporate income tax rate to 20% in 2018, which was

accompanied by a reduction in the undistributed earnings surtax from 10% to 5%. These
reforms affect the tax burdens of companies and investors, which, in turn, influence tax
avoidance decisions. Also, these reforms have effects on dividend payout policies, which
further impacted the overall value of companies.
To evaluate whether these tax reforms affected the estimation results, we divide the

sample period into five intervals based on the implementation years of the abovementioned
policies: 2000-2005, 2006-2009, 2010-2014, 2015-2017, and 2018- 2019. We then re-
estimate Equation (3) separately for each interval to assess the impact of these policy

changes on the results.

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