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Tax planning, corporate governance and firm value

Tax planning, corporate governance and firm value
Tax planning, corporate governance and firm value
Tax planning by firms is a highly significant activity. After audit fees, tax related services are the largest source of fee income for UK accounting firms. When viewed in terms of its impact, tax planning is the major source of the corporation tax gap amongst large firms (HMRC, 2010).

Although traditionally tax planning has been viewed as benefiting shareholders via increased after tax earnings, more recently the underlying motivation has been questioned. Desai and Dharmapala (2006) argue that when an information asymmetry exists between managers and shareholders with respect to tax planning, it can facilitate managers acting in their own interests resulting in a negative association between tax planning and firm value.

Using a sample of UK quoted firms from 2005-2007 and data drawn from International Accounting Standard 12 Income Taxes (IASB, 2010) Effective Tax Rate (ETR) reconciliations, this paper reports such a negative relationship. Further, the relationship is robust to the inclusion of corporate governance measures which could be expected to moderate the potential implications of a tax related shareholder-manager information asymmetry. An innovation of this paper is in using the ETR reconciliations to examine sub-categories of tax planning activities.

The paper contributes to the debate of who determines, and benefits from tax planning conducted by firms. Its findings have direct policy relevance for shareholders and tax administrations in monitoring and controlling firms’ tax planning activities.
tax planning, tax avoidance, firm value, corporate governance
0890-8389
111-124
Abdul Wahab, Nor Shaipah
a82249c8-c6c5-4f02-8b00-ba0172f70a23
Holland, Kevin
91511fcc-a84b-44b6-98ee-13b6ebde71da
Abdul Wahab, Nor Shaipah
a82249c8-c6c5-4f02-8b00-ba0172f70a23
Holland, Kevin
91511fcc-a84b-44b6-98ee-13b6ebde71da

Abdul Wahab, Nor Shaipah and Holland, Kevin (2012) Tax planning, corporate governance and firm value. British Accounting Review, 44 (2), 111-124. (doi:10.1016/j.bar.2012.03.005).

Record type: Article

Abstract

Tax planning by firms is a highly significant activity. After audit fees, tax related services are the largest source of fee income for UK accounting firms. When viewed in terms of its impact, tax planning is the major source of the corporation tax gap amongst large firms (HMRC, 2010).

Although traditionally tax planning has been viewed as benefiting shareholders via increased after tax earnings, more recently the underlying motivation has been questioned. Desai and Dharmapala (2006) argue that when an information asymmetry exists between managers and shareholders with respect to tax planning, it can facilitate managers acting in their own interests resulting in a negative association between tax planning and firm value.

Using a sample of UK quoted firms from 2005-2007 and data drawn from International Accounting Standard 12 Income Taxes (IASB, 2010) Effective Tax Rate (ETR) reconciliations, this paper reports such a negative relationship. Further, the relationship is robust to the inclusion of corporate governance measures which could be expected to moderate the potential implications of a tax related shareholder-manager information asymmetry. An innovation of this paper is in using the ETR reconciliations to examine sub-categories of tax planning activities.

The paper contributes to the debate of who determines, and benefits from tax planning conducted by firms. Its findings have direct policy relevance for shareholders and tax administrations in monitoring and controlling firms’ tax planning activities.

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Tax_Planning_Corporate_Governance_and_Equity_Value.pdf - Accepted Manuscript
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More information

Published date: 11 June 2012
Keywords: tax planning, tax avoidance, firm value, corporate governance
Organisations: Management

Identifiers

Local EPrints ID: 150017
URI: https://eprints.soton.ac.uk/id/eprint/150017
ISSN: 0890-8389
PURE UUID: 4e7c32b4-f753-4543-be12-01f5bd76f148

Catalogue record

Date deposited: 06 May 2010 13:32
Last modified: 18 Jul 2017 19:25

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Contributors

Author: Nor Shaipah Abdul Wahab
Author: Kevin Holland

University divisions

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