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While prior studies have examined how investors perceive extreme forms of tax avoidance behavior such as tax sheltering and uncertain tax position (e.g., Hanlon and Slemrod 2009;Wilson 2009;Koester 2011;Hutchens and Rego 2012), there is little evidence on how investors perceive less extreme forms of tax avoidance. This study fills this void by examining the relation between firm's cost of equity and corporate tax avoidance using three measures that capture less extreme forms of corporate tax avoidance: book-tax differences, permanent book-tax differences, and long-run cash effective tax rates. We find that less aggressive forms of corporate tax avoidance significantly reduces a firm's cost of equity. Further analyses reveal that this effect is stronger for (i) firms with better outside monitoring, (ii) firms that likely realize higher marginal benefits from tax savings, and (iii) firms with better information quality. Our study presents large-sample results on how investors perceive less aggressive corporate tax avoidance and shows that tax planning is a value-enhancing activity for shareholders. Choudhary, P., Koester, A., Shevlin, T., 2012. Assessing tax accrual quality. Working Paper, Georgetown University. Claus, J., Thomas, J., 2001. Equity premia as low as three percent? Evidence from analysts' earnings forecasts for domestic and international stock markets. The Journal of Finance 56 (5), 1629-1666. Dechow, P.M., Dichev, I.D., 2002. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77, 35-59. Denis, D.J., Sibilkov, V., 2010. Financial constraints, investment, and the value of cash holdings. Review of Financial Studies 23 (1), 247-269. Desai, M., 2004. The degradation of corporate profits. Harvard University, working paper. 34 Desai, M., Dharmapala, D., 2006. Corporate tax avoidance and high-powered incentives.

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This study examines the relation between internal controls and conditional conservatism (“conservatism”), also referred to as timely loss recognition. Using a sample of firms that disclose material weaknesses (MWs) in internal controls under the Sarbanes-Oxley Act (SOX), we find a positive relation between internal control quality and conservatism. Specifically, firms with MWs exhibit lower conservatism than firms without such weaknesses. Further, firms that disclose MWs and subsequently remediate these weaknesses exhibit greater conservatism than firms that continue to have MWs. Overall, these results are consistent with strong internal controls acting as a mechanism that facilitates conservatism. Our study contributes to the literature on the reporting effects of strong versus weak internal controls.

In this study, we examine whether internal control over financial reporting affects firm operational efficiency. We find that operational efficiency, derived from frontier analysis, is significantly lower among firms with material weaknesses in internal control relative to firms without such weaknesses. We also find that the remediation of material weaknesses leads to an improvement in operational efficiency. Additional analyses indicate that the negative effect of material weaknesses on operational efficiency is stronger for firms with a greater demand for higher quality information for decision making, for weaknesses that are deemed to be more severe, and to a certain extent, for smaller firms. Overall, our study extends the literature by presenting systematic evidence on the effect of effective internal control on operational efficiency and informs the debate over the costs and benefits of the internal control reporting requirements under the Sarbanes‐Oxley Act of 2002.