Corporate Political Connections and Tax Aggressiveness
Chansog (Francis) Kim
Wayne State University; City University of Hong Kong - College of Business
City University of Hong Kong
December 15, 2013
This study investigates the relation between corporate political connections and tax aggressiveness. We study a broad array of corporate political activities, including the employment of connected directors, campaign contributions, and lobbying. Using a large hand-collected dataset of U.S. firms’ political connections, we find that politically connected firms are more tax aggressive than non-connected firms, after controlling for other determinants of tax aggressiveness, industry and year fixed effects, and the endogenous choice of being politically connected. Our findings are robust to various measures of political connections and tax aggressiveness. In examining the potential mechanisms, we find that the probability of an IRS audit is lower for politically connected firms than non-connected firms. Further, we show that tax aggressiveness is positively related to cost of equity and cost of bank loans for non-connected firms but not for connected firms. Finally, the positive relation between political connections and tax aggressiveness is stronger for firms with lower CEO equity risk incentives and firms with lower institutional ownership. These results are consistent with the conjecture that politically connected firms are more tax aggressive because of their lower expected cost of tax enforcement, lower capital market pressure for transparency, and greater risk-taking tendencies induced by political connections.
Number of Pages in PDF File: 73
Keywords: Political connections, tax aggressiveness, tax avoidance, campaign contributions, lobbying
JEL Classification: H26, D72, G34working papers series
Date posted: August 1, 2013 ; Last revised: December 16, 2013
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