Tax Avoidance and Firm Value: International Evidence*²³

Desai and Dharmapala (2006, 2009a, b) and Desai et al. (2007) propose that corporate governance plays a crucial mediating role in the relationship between tax avoidance and firm value (the D&D theory). This theory has received considerable attention in the tax accounting literature, but evidence remains mixed. We extend the D&D theory to an international setting and argue that country-level characteristics moderate the relationship between tax avoidance and firm value. Using a sample of firms from 45 countries, we find that the relationship between tax avoidance and firm value is positive when transparency or stock market development is high but negative when investor protection is strong. Our findings suggest that a key determinant of the positive effect of tax avoidance on firm value is a transparent and developed stock market environment. Under low transparency, shareholders in countries with strong investor protection regard tax avoidance as a negative signal of managerial diversion due to a lack of understanding of tax avoidance. Our research contributes to the debate on the link between tax avoidance and firm value according to the D&D theory by providing additional insights on the mediating roles of country characteristics.