Firm valuation and the uncertainty of future tax avoidance

Using a valuation framework, we show that two dimensions of tax avoidance, uncertainty and the level of expected future tax rates, are jointly related to firm value and need to be expressed as a ratio. We confirm the importance of a composite measure of tax avoidance adjusted for tax uncertainty in our empirical tests based on a sample of U.S. firms. Our findings indicate that shareholders jointly consider the level and uncertainty of future tax avoidance when valuing firms.