Corporate Tax Avoidance and Cost of Equity Capital: The Case of Taiwan
2020
Using the data of Taiwan’s listed firms, this paper shows that the cost of equity capital is
negatively associated with firms’ tax avoidance activities. This effect is stronger for firms that
have better outside monitoring, greater growth opportunities, and higher information quality.
These results suggest that the positive cash flow effect of corporate tax avoidance can reduce
the cost of equity capital. In other words, investors require lower rates of return on equity for
firms with more tax avoidance activities because they expect that tax avoidance can generate
positive cash flows.
Key words: Corporate tax avoidance, cost of equity, outside monitoring, growth opportunities,
information quality
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