ABSTRACT
Purpose of the paper. The empirical studies on corporate tax avoidance have grown to a considerable level over the past two decades. However, this research has mostly focused on the determinants of corporate tax avoidance, and much less is known on the economic consequences of avoiding taxes. This paper fills this research gap. We synthesize and review the relevant research on the financial reporting, cost of capital, and firm value consequences of corporate tax avoidance of the past two decades. We focus on reporting, financial, and firm value consequences of avoiding taxes because these topics are paramount for accounting and finance scholars undertaking tax research.
Methodology. To thoroughly evaluate extant research, we rely on the “Scholes-Wolfson”
theoretical framework because it allows us to not only organize all empirical studies published in the top accounting and finance journals over the last two decades, but also to identify potential inconsistencies and fruitful paths for future research.
Findings. Using the “Scholes-Wolfson” framework we are able to identify several research gaps on the relationship between tax avoidance, cost of capital, and firm value. Our results suggest that further research is needed either because the theory is clear but the empirical
evidence does not support the theory or because the theory is still unclear and the empirical results are evidently mixed.
Originality. The paper provides a structured review of the relatively young – but rapidly growing – literature on the economic consequences of corporate tax avoidance of the last two decades. Compared to prior reviews, which mostly deal with whether and why firms avoid taxes and primarily focus on U.S.-centered work, this paper analyzes what happens to tax-avoiding firms and broadens the scope to incorporate US and non-US firms and their corporate tax avoidance practices.
KEYWORDS
Literature review; tax avoidance; corporate transparency; cost of capital; firm value.
