Derivative financial instruments, tax aggressiveness and firm market value

Abstract

Purpose

The purpose of this study is to examine the relationship of using derivative financial instruments, tax aggressiveness and firm market value.

Design/methodology/approach

This paper develops analytical models and designs an empirical study.

Findings

Using data from large Canadian public companies, this paper finds that a firm’s realized losses or unrealized gains from using derivatives are negatively associated with its effective tax rate, and a firm’s realized losses or unrealized gains from using derivatives are positively associated with its market value.

Research limitations/implications

This study simplifies the analytical model by separating the firm’s intrinsic market value from the tax-timing option value. In a more general framework, the tax-timing option value could be subsumed in the firm’s market value, and the firm’s market value would be determined endogenously.

Originality/value

This study develops a framework to show how firms exploit the tax-timing option by using derivatives. It is the first study to conclude that a motive for firms to use derivatives is to exploit the tax-timing option.

Citation

Zeng, T. (2014), "Derivative financial instruments, tax aggressiveness and firm market value", Journal of Financial Economic Policy, Vol. 6 No. 4, pp. 376-390. https://doi.org/10.1108/JFEP-02-2014-0013