Are Family Firms More Tax Aggressive Than Non-Family Firms?

57 Pages Posted: 13 Sep 2007 Last revised: 9 Apr 2013

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Terry J. Shevlin

University of California-Irvine

Date Written: Februrary 23, 2009

Abstract

Taxes represent a significant cost to the firm and shareholders, and it is generally expected that shareholders prefer tax aggressiveness. However, this argument ignores potential non-tax costs that can accompany tax aggressiveness, especially those arising from agency problems. Firms owned/run by founding family members are characterized by a unique agency conflict between dominant and small shareholders. Using multiple measures to capture tax aggressiveness and founding family presence, we find that family firms are less tax aggressive than their non-family counterparts, ceteris paribus. This result suggests that family owners are willing to forgo tax benefits in order to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders' concern with family rent-seeking masked by tax avoidance activities (Desai and Dharmapala 2006). This inference is further strengthened by our finding that family firms without long-term institutional investors (as outside monitors) and family firms expecting to raise capital exhibit even lower tax aggressiveness. Our result is also consistent with family owners being more concerned with the potential penalty and reputation damage from an IRS audit than non-family firms. We obtain similar inferences when using a small sample of tax shelter cases.

Keywords: family firm, tax aggressiveness, entrenchment

JEL Classification: D82, H25, H24, G32

Suggested Citation

Chen, Shuping and Chen, Xia and Cheng, Qiang and Shevlin, Terry J., Are Family Firms More Tax Aggressive Than Non-Family Firms? (Februrary 23, 2009). AAA 2008 Financial Accounting and Reporting Section (FARS) Paper; Journal of Financial Economics (JFE), Forthcoming; (CAAA) 2008 Annual Conference Paper. Available at SSRN: https://ssrn.com/abstract=1014280 or http://dx.doi.org/10.2139/ssrn.1014280

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Xia Chen (Contact Author)

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

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