Tax avoidance and firm value: The role of legal protection for investor rights

Our paper explores how corporate governance affects the valuation of tax avoidance. We argue that better governance enhances investor valuation of tax avoidance primarily through deterring managers from misallocating tax savings to pursue their private benefits. By exposing cross-country data, we find that investors on average negatively value corporate tax avoidance and such negative valuation is attenuated in countries with strong protection for investor rights. Our findings suggest that the primary agency issue concerning tax avoidance is the misallocation of tax savings instead of managers exploiting tax avoidance to shield their rent extraction.