Essays on tax avoidance and risk

This paper reviews the empirical literature on the real effects of tax avoidance. I survey three main areas of the literature: (1) capital structure choices, (2) investments and cash holdings, (3) investors’ valuation. In each section, I summarize the existing works focusing on the existing empirical issues and sources of measurement errors that possibly explain the inconsistencies across studies. Moreover, this study examines the relation between CEO and CFO inside debt holdings and corporate tax avoidance. As executives’ inside debt holdings are unsecured and unfunded, they should align CEOs and CFOs interests with those of outside debtholders. As theory suggests, inside debt holdings incentivize executives to act more conservatively towards risk. Therefore, we focus on the level of tax risk of the corporate tax planning strategy and use different proxies to capture the difference in tax risk. While we expect inside debt holdings to curb executives’ risk taking behaviour towards risky tax avoidance, the effect on less risky tax strategies is unclear, as tax avoidance increases current cash flows and can also be beneficial to debtholders. Consistent with the prediction, we document a negative association between CEOs and CFOs inside debt holdings and higher levels of tax risk (proxied by the GAAP and cash effective tax rate volatility).