Trading on Tax Avoidance

Abstract

How should investors value corporate tax avoidance? Previous research has not demonstrated whether the stock market fully incorporates this information into firms’ share prices. The purpose of this study is to determine whether equity investors can generate abnormal returns from trading on the tax aggressiveness of publicly-traded firms. I expect and find aggressive tax avoidance to be a predominantly positive influence on firms’ returns’ and, thus, in equity investing. Overall, I find evidence that trading strategies based on either firms’ tax level or the volatility of firms’ tax rates can yield economically meaningful abnormal returns for investors implying that the stock market does not fully incorporate firms’ tax information into share prices.