How Do Investors Value Tax Avoidance Under the Imputation Tax System?

ABSTRACT This study investigates how the imputation tax system affects investor valuation of corporate tax avoidance. We find that under the full imputation tax system, investors assign a lower value to corporate tax avoidance, compared to the classical tax system, as tax avoidance reduces imputation credits available to shareholders, effectively transferring cash flows from shareholders to firms. Additionally, under the full imputation tax system, this negative valuation effect on corporate tax avoidance is more pronounced in firms with higher dividend payouts. We also find that stronger investor protection and greater firm growth opportunities mitigate the negative valuation of the cash flow transfer induced by tax avoidance, suggesting that investors are concerned about whether the transferred cash is efficiently utilized by the firm. These results challenge the traditional view that corporate tax avoidance enhances shareholder value and highlight the importance of tax system characteristics when evaluating the financial implications of tax avoidance.