How Do Cross-Country Differences in Corporate Tax Rates Affect Firm Value?

ABSTRACT We examine how differences in corporate tax rates across countries affect firm value for U.S. multinationals. Although competition for tax benefits may increase non-tax costs, in an international setting, transaction costs and other frictions may prevent tax differences from being completely competed away. We find that firm value, as measured by Tobin's q, is negatively related to foreign effective tax rates. This result is robust to the presence of growth and risk proxies and other control variables in the model. Our results provide empirical evidence that (1) differences in corporate tax rates are not completely offset by non-tax costs, and (2) the differences in tax costs are reflected in higher firm value for the low tax rate firms.