Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance

Abstract:     
This study uses a unique international setting to examine managerial incentives, driven by manager-shareholder alignment, to avoid corporate taxes. We exploit changes in a country’s shareholder dividend tax policy, which are exogenous to the firm, to examine if managers engage in corporate tax avoidance to increase shareholder value or to increase their private benefits. Specifically, we examine changes in corporate tax avoidance after the elimination, as well as enhancement, of imputation systems around the world. Under full imputation systems, corporate tax avoidance does not increase shareholder wealth, but can increase managers’ private benefits. Therefore, the effect of an elimination or enhancement of an imputation system on corporate tax avoidance will depend on the alignment between managers and shareholders. Our results are consistent with managers engaging in corporate tax avoidance to benefit shareholders. In cross-sectional tests, we find evidence consistent with higher corporate tax avoidance for closely-held firms in countries where a shareholder benefit exists. Our findings have implications for our understanding of the effect of manager-shareholder alignment on corporate tax avoidance and the debate over tax reform.

Number of Pages in PDF File: 57

Keywords: principal-agent, managerial incentives, imputation, corporate tax avoidance, dividend taxation, tax policy

working papers series