Dual Class Ownership and Tax Avoidance

Abstract

This study investigates whether the agency conflicts inherent in a dual class ownership structure are associated with the level of firms’ tax avoidance. Dual class ownership presents a unique agency problem because insiders’ voting rights (i.e., insiders’ ability to control the firm) exceed their cash flow rights (i.e., insiders’ claim on the cash payouts of the firm). Thus, insiders control a majority of the votes of a firm despite having claims to a minority of the firm’s cash flows. We examine the levels of non-conforming and conforming tax avoidance for a sample of dual class firms. Among dual class firms, we find that the extent of non-conforming tax avoidance is declining as the difference between voting rights and cash flow rights increases. In addition, we find that the difference between voting rights and cash flow rights is associated with lower levels of conforming tax planning among dual class firms. We also compare the level of tax avoidance of dual class firms to other publicly traded firms and find that dual class firms engage in lower levels of non-conforming and conforming tax planning. These findings are consistent with the quiet life view, which suggests that when managers are insulated from takeover they avoid the costly effort associated with increased tax planning activities.