Taylor, Richardson, Al-Hadi, and Obaydin (2018; hereafter TRAO), examine the relation between their measure of tax haven utilization and the implied cost of capital estimated by reverse-engineering accounting-based valuation models. They report that a 0.3 percent (or a 30 basis point) increase in their estimate of the implied cost of capital is associated with a one standard deviation (i.e., an 11.8 percent or a 1,180 basis point) increase in their measure of tax haven utilization.
My discussion will focus on this key result. I will discuss three issues. First, is the positive association between tax haven utilization and cost of capital expected? Does a positive association between tax haven utilization and cost of capital follow from the arguments provided in the paper? Second, how reliable are the measures of tax haven utilization and implied cost of capital? Are they sufficiently reliable to facilitate measurement (or isolation) of a significant...
