Corporate Governance, Incentives, and Tax Avoidance

Corporate Governance, Incentives, and Tax Avoidance

By David F. Larcker, Christopher Armstrong, Jennifer Blouin, Alan D. Jagolinzer
February 25,2015Working Paper No. 2134

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over- and under-investment by managers.

Keywords
Tax aggressiveness, FIN 48, tax avoidance, CEO incentives, corporate governance