Download this Paper Open PDF in Browser

Dual Class Ownership and Tax Avoidance

43 Pages Posted: 15 Feb 2011 Last revised: 23 Apr 2011

Sean T. McGuire

Texas A&M University - Department of Accounting

Dechun Wang

Texas A&M University

Ryan J. Wilson

University of Oregon

Date Written: February 14, 2011

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.

Suggested Citation

McGuire, Sean T. and Wang, Dechun and Wilson, Ryan J., Dual Class Ownership and Tax Avoidance (February 14, 2011). 2011 American Taxation Association Midyear Meeting: JATA Conference. Available at SSRN: https://ssrn.com/abstract=1761994 or http://dx.doi.org/10.2139/ssrn.1761994

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Dechun Wang

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

Ryan J. Wilson (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Paper statistics

Downloads
874
Rank
21,530
Abstract Views
3,933