Externalities of Corporate Tax Avoidance
نویسندگان
چکیده
We show that when a meaningful proportion of firms in an economy engage in tax avoidance strategies, the covariance between a firm’s cash flow and the market cash flows increases, thereby increasing a firm’s cost of capital. This negative externality is imposed on all firms in the economy, not just tax-avoiding firms. The negative externality results regardless of the level of uncertainty associated with the tax avoidance; however, tax avoidance with more uncertain outcomes exacerbates the effect. The negative externality is most burdensome on firms that do not engage in tax avoidance because these firms do not benefit from the increase in after-tax cash flow that is associated with tax avoidance. Our results should be of interest to policy makers who are analyzing the costs associated with tax avoidance and strategies to curb it as well as to empirical researchers examining the relation between cost of capital and tax avoidance.
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