The Relationship between Product Market Power and Tax Avoidance Affects on Investors and the Companies in the Industry
Asian Tax Journal Vol. 18 No. 1 (2017), pp. 77-113
Abstract
High－profile market leaders are their powerful influence in their respective product market. Product market leaders have more natural hedge against negative outcomes than their competitors. Therefore those firms have more opportunities and potentially greater incentives to engage in tax avoidance. This study, in this respect, investigates whether the tax avoidance strategies of product market leaders affect the tax－planning of less powerful firms and investors to determine the impact of these activities on firm value. The empirical results of this study are as follows. First, we test whether the tax－planning of less powerful firms mimic the tax avoidance of product market leaders. This result show that firms have significantly positive associations with tax avoidance of product market leaders. It suggests that firms mimic their product market leaders. Second, we examine whether the higher tax avoidance of firms with greater product market power is related to subsequent stock returns. This result show that the future stock returns have significantly negative associations with the interaction of tax avoidance and product market power. This suggests that investors evaluate negatively for the tax avoidance of firms with greater product market power. Our study will be able to provide a foundation for subsequent researches related to firm－level product market power on a firm’s tax avoidance. Our paper contributes to better understand the effect of tax avoidance on the association between product market power and firm value.
Keywords
- tax avoidance
- product market power
- mimicry
- valuation of tax avoidance
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