Lead Independent Directors and Corporate Tax Policy

Companies voluntarily adopt lead independent directors (LIDs) for the benefits they could bring to the board, such as further improving board independence, mitigating unresolved agency issues, enhancing board monitoring, and countering criticisms of corporate governance. We find that companies with LIDs have more conservative tax policies. The influence of LIDs on corporate tax policies is greater when the level of tax avoidance is more aggressive compared to their size and industry peers. We also find that investors favorably value the more conservative tax policies of companies with LIDs. Companies with LIDs have lower tax risk, pursue more conservative tax planning, such as lower UTB settlements, and are less likely to use tax shelters. These companies do not have aggressive valuation allowance releases and have fewer permanent book‐tax differences. Lastly, we also find an associated non‐tax benefit: CEOs in companies with LIDs do not have a higher likelihood of subsequent forced turnover for not engaging in tax avoidance. Thus, he investors’ higher valuation of more conservative corporate tax policies reduces the likelihood of subsequent forced CEO turnover.