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Corporate Governance, Incentives, and Tax Avoidance

  • Armstrong, Christopher S.

    (University of PA)

  • Blouin, Jennifer L.

    (University of PA)

  • Jagolinzer, Alan D.

    (University of CO)

  • Larcker, David F.

    (Stanford University)

Registered author(s):

    This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution. Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.

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    File URL: https://gsbapps.stanford.edu/researchpapers/library/RP2134.pdf
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    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2134.

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    Date of creation: Apr 2013
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    Handle: RePEc:ecl:stabus:2134
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    1. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Christopher S. Armstrong & Alan D. Jagolinzer & David F. Larcker, 2010. "Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 225-271, 05.
    3. Keith J. Crocker & Joel Slemrod, 2004. "Corporate Tax Evasion with Agency Costs," NBER Working Papers 10690, National Bureau of Economic Research, Inc.
    4. Minnick, Kristina & Noga, Tracy, 2010. "Do corporate governance characteristics influence tax management?," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 703-718, December.
    5. Slemrod, Joel, 2004. "The Economics of Corporate Tax Selfishness," National Tax Journal, National Tax Association, vol. 57(4), pages 877-99, December.
    6. Gupta, Sanjay & Newberry, Kaye, 1997. "Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data," Journal of Accounting and Public Policy, Elsevier, vol. 16(1), pages 1-34.
    7. Milton Harris & Artur Raviv, 2008. "A Theory of Board Control and Size," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1797-1832, July.
    8. Desai, Mihir & Dyck, Alexander & Zingales, Luigi, 2004. "Theft and Taxes," CEPR Discussion Papers 4816, C.E.P.R. Discussion Papers.
    9. Mihir Desai & Dhammika Dharmapala, . "Corporate Tax Avoidance and High Powered Incentives," American Law & Economics Association Annual Meetings 1006, American Law & Economics Association.
    10. Mihir A. Desai & Dhammika Dharmapala, 2005. "Corporate Tax Avoidance and Firm Value," NBER Working Papers 11241, National Bureau of Economic Research, Inc.
    11. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    12. Chen, Shuping & Chen, Xia & Cheng, Qiang & Shevlin, Terry, 2010. "Are family firms more tax aggressive than non-family firms?," Journal of Financial Economics, Elsevier, vol. 95(1), pages 41-61, January.
    13. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, 04.
    14. Bushman, Robert & Chen, Qi & Engel, Ellen & Smith, Abbie, 2004. "Financial accounting information, organizational complexity and corporate governance systems," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 167-201, June.
    15. John Core, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, 06.
    16. Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 321-387, September.
    17. Kong-Pin Chen & C.Y. Cyrus Chu, 2005. "Internal Control vs. External Manipulation: A Model of Corporate Income Tax Evasion," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 151-164, Winter.
    18. Armstrong, Christopher S. & Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2012. "The Relation between Equity Incentives and Misreporting: The Role of Risk-Taking Incentives," Research Papers 2120, Stanford University, Graduate School of Business.
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