Corporate Governance, Incentives, and Tax Avoidance

Journal of Accounting and Economics 60 (August 2015): 1–17.

Rock Center for Corporate Governance at Stanford University Working Paper No. 136

43 Pages Posted: 18 Apr 2013 Last revised: 17 Jul 2015

Chris Armstrong

University of Pennsylvania - Accounting Department

Jennifer L. Blouin

University of Pennsylvania - Accounting Department

Alan D. Jagolinzer

University of Colorado - Leeds School of Business

David F. Larcker

Stanford University - Graduate School of Business

Date Written: February 25, 2015

Abstract

We examine the link between corporate governance, managerial incentives, and corporate tax avoidance. Similar to other investment opportunities that involve risky expected cash flows, unresolved agency problems may lead managers to engage in more or less corporate tax avoidance than shareholders would otherwise prefer. Consistent with the mixed results reported in prior studies, we find no relation between various corporate governance mechanisms and tax avoidance at the conditional mean and median of the tax avoidance distribution. However, using quantile regression, we find a positive relation between board independence and financial sophistication for low levels of tax avoidance, but a negative relation for high levels of tax avoidance. These results indicate that these governance attributes have a stronger relation with more extreme levels of tax avoidance, which are more likely to be symptomatic of over- and under-investment by managers.

Keywords: Tax aggressiveness, FIN 48, tax avoidance, CEO incentives, corporate governance

JEL Classification: G34, H25, H26, K34, M41

Suggested Citation

Armstrong, Chris and Blouin, Jennifer L. and Jagolinzer, Alan D. and Larcker, David F., Corporate Governance, Incentives, and Tax Avoidance (February 25, 2015). Journal of Accounting and Economics 60 (August 2015): 1–17.; Rock Center for Corporate Governance at Stanford University Working Paper No. 136. Available at SSRN: https://ssrn.com/abstract=2252682 or http://dx.doi.org/10.2139/ssrn.2252682

Chris S. Armstrong (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jennifer L. Blouin

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Alan D. Jagolinzer

University of Colorado - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

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