Tax risk, corporate governance, and the valuation of tax avoidance across Philippine firms: How do investors value corporate tax avoidance?

• Main Authors: Ang, Christine E., Chan, Shawn Luther S., Sow, Sean Ellison G., Yap, Siegwald K.
• Format: text
• Language: English
• Published: Animo Repository 2022
• Subjects: Tax evasion—Philippines; Corporate governance—Philippines; Taxation
• Online Access: https://animorepository.dlsu.edu.ph/etdb_econ/26; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1032&context=etdb_econ
• Institution: De La Salle University

Corporate tax avoidance has traditionally been thought to enhance firm value because it generates cash tax savings. Recent literature on tax risk and the agency perspective on tax avoidance, however, suggests that the value of tax avoidance diminishes in certain situations. In tax risk literature, the value of tax avoidance has been observed to diminish when it entails higher tax risk. Investors discount the value of tax avoidance when it produces uncertain tax outcomes. In the literature on the agency perspective on tax avoidance, the value of tax avoidance has been observed at zero to negative when strong corporate governance is absent. Investors assign tax avoidance no value, or even negative value in some cases, when there is a lack of strong corporate governance to prevent rent extraction and protect tax savings. In this study, we examine the effect of tax avoidance on firm value while considering tax risk and corporate governance for non-utility, non-financial, and non-PEZA firms listed on the Philippine Stock Exchange from 2012 to 2019. We employ a two-step generalized method of moments estimation technique using two measures of tax avoidance, two measures of tax risk, and one measure of corporate governance quality to examine any relation between firm value and the set of factors consisting of tax avoidance, tax risk, and corporate governance quality. Consistent with agency theory, we find that investors negatively value tax avoidance. We conclude that for Philippine investors, negative concerns about agency costs arising from tax avoidance activities overshadow positive expectations about their benefits. Furthermore, we ascertain that good corporate governance alleviates the negative valuation of tax avoidance.