Abstract

This paper investigates whether corporate tax avoidance activities affect firm value and auditors’ industry expertise affects the relation between corporate tax avoidance activities and firm value. The traditional view of corporate tax avoidance that reduces transfers from shareholders to the government suggests that firm value should increase with tax avoidance activities. However, the agency perspective of tax avoidance suggests that opportunistic managers may exploit tax avoidance to camouflage rent extraction. In this paper, We analyze 3,607 non-financial and December year-end firm/year observations listed in the Korean KOSPI market during 2001 and 2010. Tax avoidance is measured using the difference between book income and taxable income not attributable to accounting accruals(Desai and Dharmapala 2006). Firm value is measured using Tobin’s q and market to book ratio(MTB). Four proxies of auditors’ industry expertise is measured using market share approach. We use interaction between corporate tax avoidance activities and auditors’ industry expertise to examine how auditors’ industry expertise affects the realtion between tax avoidance and firm value, We find following empirical results. First, corporate tax avoidance activities have a negative effect on corporate firm value. Second, auditors’ industry expertise reduces the negative relation between corporate tax avoidance activities and firm value. This paper contributes to the literature by examining the impact of auditors’ industry expertise on corporate tax avoidance behavior. Overall, our results suggest that auditors’ industry expertise plays an important role in facilitating the monitoring of managerial actions and thus alleviates shareholers’ concern about the hidden agency costs associated with tax avoidance.

Keywords

• Auditors’ Industry Expertise
• Tax Avoidance
• Firm Value

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