The Effect of Tax Aggressiveness on Investment Efficiency
Tax aggressiveness generates significant cash savings and information asymmetry. Combining these two consequences of tax aggressiveness, I suggest that tax aggressiveness is associated with higher agency costs of free cash flows that affect investment decisions. Using the conditional investment effi...
| Main Author: | |
|---|---|
| Other Authors: | |
| Language: | en_US |
| Published: |
The University of Arizona.
2016
|
| Subjects: | |
| Online Access: | http://hdl.handle.net/10150/612100 http://arizona.openrepository.com/arizona/handle/10150/612100 |
| Summary: | Tax aggressiveness generates significant cash savings and information asymmetry. Combining these two consequences of tax aggressiveness, I suggest that tax aggressiveness is associated with higher agency costs of free cash flows that affect investment decisions. Using the conditional investment efficiency model, I find evidence that tax aggressiveness is associated with more investments in firms with high access to investable funds, thus suggesting tax aggressiveness is associated with overinvestment. I also provide evidence that stronger tax monitoring and a change in tax disclosures mitigate the relation between tax aggressiveness and overinvestment. Lastly, I find that the overinvestment is associated with lower future abnormal returns. Thus, my results suggest that poor managerial investment decision making is an unintended consequence to tax aggressiveness. Additionally, I further the need for shareholders and board of directors to exert influence to avoid compensating managers for aggressive tax strategies. |
|---|