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The separation of ownership and control and corporate tax avoidance

Author

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  • Badertscher, Brad A.
  • Katz, Sharon P.
  • Rego, Sonja O.

Abstract

We examine whether variation in the separation of ownership and control influences the tax practices of private firms with different ownership structures. Fama and Jensen (1983) assert that when equity ownership and corporate decision-making are concentrated in just a small number of decision-makers, these owner-managers will likely be more risk averse and thus less willing to invest in risky projects. Because tax avoidance is a risky activity that can impose significant costs on a firm, we predict that firms with greater concentrations of ownership and control, and thus more risk averse managers, avoid less income tax than firms with less concentrated ownership and control. Our results are consistent with these expectations. However, we also consider a competing explanation for these findings. In particular, we examine whether certain private firms enjoy lower marginal costs of tax planning, which facilitate greater income tax avoidance. Our results are consistent with the marginal costs of tax avoidance and the separation of ownership and control both influencing corporate tax practices.

Suggested Citation

  • Badertscher, Brad A. & Katz, Sharon P. & Rego, Sonja O., 2013. "The separation of ownership and control and corporate tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 228-250.
  • Handle: RePEc:eee:jaecon:v:56:y:2013:i:2:p:228-250
    DOI: 10.1016/j.jacceco.2013.08.005
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    Cited by:

    1. Ana Isabel Martins Ribeiro & António Cerqueira & Elísio Brandão, 2015. "The Determinants of Effective Tax Rates: Firms’ Characteristics and Corporate Governance," FEP Working Papers 567, Universidade do Porto, Faculdade de Economia do Porto.
    2. repec:eee:jfinec:v:124:y:2017:i:3:p:441-463 is not listed on IDEAS
    3. repec:gam:jsusta:v:11:y:2019:i:5:p:1441-:d:212169 is not listed on IDEAS
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    5. repec:wsi:serxxx:v:63:y:2018:i:04:n:s0217590817420073 is not listed on IDEAS
    6. Scott D. Dyreng & Jeffrey L. Hoopes & Jaron H. Wilde, 2016. "Public Pressure and Corporate Tax Behavior," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 147-186, March.
    7. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9398-y is not listed on IDEAS
    8. Huang, Henry He & Lobo, Gerald J. & Wang, Chong & Xie, Hong, 2016. "Customer concentration and corporate tax avoidance," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 184-200.
    9. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian & Wu, Qiang, 2016. "CEO political preference and corporate tax sheltering," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 37-53.
    10. repec:eee:jbrese:v:79:y:2017:i:c:p:161-172 is not listed on IDEAS
    11. repec:eee:jiaata:v:33:y:2018:i:c:p:40-63 is not listed on IDEAS
    12. Hasan, Iftekhar & Kim, Incheol & Teng, Haimeng & Wu, Qiang, 2016. "The effect of foreign institutional ownership on corporate tax avoidance: international evidence," Research Discussion Papers 26/2016, Bank of Finland.
    13. Ayash, Brian & Schütt, Harm, 2016. "Does going private add value through operating improvements?," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 192-215.
    14. repec:eco:journ1:2019-01-16 is not listed on IDEAS
    15. repec:eee:corfin:v:48:y:2018:i:c:p:492-514 is not listed on IDEAS
    16. Juan Monterrey Mayoral & Amparo Sánchez Segura, 2015. "Planificación fiscal y Gobierno Corporativo en las empresas cotizadas españolas," Hacienda Pública Española, IEF, vol. 214(3), pages 55-89, September.

    More about this item

    Keywords

    Ownership structure; Agency costs; Tax avoidance; Private equity firms; Effective tax rates;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

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