Santanu Mitra accepted for publication in Review of Pacific Basin Financial Markets and Policies
Mike Ilitch School of Business Professor of Accounting Santanu Mitra has had a paper accepted for publication in the Review of Pacific Basin Financial Markets and Policies, which deals with quantitative and qualitative research involving financial markets and policies of the Pacific Basin area.
The paper, “Tax avoidance and corporate investments,” was co-authored by Mahmud Hossain (University of West Georgia) and Gerald Lobo (University of Houston).
This study examines the association between firms’ tax avoidance and long-term investments. We find that tax avoidance firms make greater investment than non-tax avoidance firms, and that the positive association between tax avoidance and investments holds both for firms that are financially constrained, and therefore ex-ante likely to underinvest, and for financially unconstrained firms that are ex-ante more likely to overinvest. Our results further show that CEO equity incentives and governance strength exert an incremental effect on investment decisions of tax avoidance firms. In additional analyses, we demonstrate that tax avoidance firms’ investments are associated with improved future firm performance especially when those firms are ex-ante more likely to underinvest. For tax avoidance firms that are ex-ante more likely to overinvest, current investments are associated with declined future firm performance. Tax avoidance firms have higher (lower) investment efficiency in terms of improved (declined) operating profitability in the post-investment period when they have lower (higher) CEO equity incentives and stronger (weaker) governance. Overall, our results shed light on efficiency in utilizing the available cash through tax avoidance in long-term investments that might create shareholder value for a group of financially constrained firms but diminish shareholder value for another group of financially unconstrained firms.