Market value and tax litigation in Brazilian companies

Abstract

This article aimed to examine the effect of tax provisions and contingent liabilities on the market value of companies and to identify the factors influencing the degree of tax litigation. Previous research has focused on disclosure and accounting compliance indices. However, there is a scarcity of studies analyzing the impact of tax litigation on the market value of companies, its main causes, and its determinants. Tax litigation is a topic of interest on the Organization for Economic Cooperation and Development (OECD) agenda, and Brazil has one of the highest rates in the world. The Securities and Exchange Commission of Brazil (Comissão de Valores Imobiliários – CVM) has also addressed the issue by encouraging the disclosure of tax liabilities. This research is academically and practically relevant because it provides evidence of the impact of tax litigation on market value and demonstrates the possibility of accounting classification management, using a single database. This study highlights the main causes of tax litigation and their impact on market value. It also shows that tax litigation can be used as an earnings management mechanism, affecting companies and their stakeholders. Data were collected from reference forms and explanatory notes from companies (2015-2020) to create a comprehensive database. Regression models analyze the effects of tax litigation on market value and its determinants using panel data. The results indicate that tax litigation negatively impacts the market value of companies. Organizations tend to classify tax litigation as contingencies rather than provisioning it as a liability, particularly in the beverage, telecommunications, metallurgy, and oil and gas industries. The main causes of tax litigation are the deductibility of goodwill and the taxation of foreign profits. The degree of litigation is determined by tax burden, value added going to the government, existence of losses, and sector of activity. These findings contribute to the existing literature and suggest the possibility of management in the classification between provisions and contingent liabilities.