Do Managers Extract Economically Significant Rents Through Tax Aggressive Transactions?

Abstract

Two influential papers in the tax avoidance literature (Desai and Dharmapala 2006 and Desai et al. 2007) argue that tax avoidance can be used to facilitate managerial rent extraction from shareholders. Even though many subsequent papers have asserted a relation between tax avoidance and rent extraction, there is little empirical evidence to support that assertion. The most direct large sample empirical evidence in support of this theory comes from Russia, which has a much different regulatory and corporate governance environment than the United States, but subsequent studies relying on this theory focus on US firms. I test for large sample evidence that tax avoidance is associated with economically significant managerial rent extraction from shareholders in the US. I am unable to provide evidence that tax avoidance is related to managerial rent extraction on average. I conclude that researchers should exercise care when making predictions that assume a relation between rent extraction and tax avoidance by carefully considering whether this theory is appropriate for the firms in their sample.

Keywords: tax avoidance, corporate governance, rent extraction