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Governance and Taxes: Evidence from Regression Discontinuity

55 Pages Posted: 4 Mar 2015 Last revised: 6 May 2016

Andrew Bird

Carnegie Mellon University

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business

Date Written: April 1, 2016

Abstract

We implement a regression discontinuity design to examine the effect of institutional ownership on tax avoidance. Positive shocks to institutional ownership around Russell index reconstitutions lead, on average, to significant decreases in effective tax rates (ETRs) and greater use of international tax planning using tax haven subsidiaries. These effects are smaller for firms with initially strong governance and high executive equity compensation, suggesting poor governance as an explanation for the undersheltering puzzle, and appear to come about as a result of improved managerial incentives and increased monitoring by institutional investors. Furthermore, we observe the largest decreases among high ETR firms, and increases for low ETR firms, consistent with institutional ownership pushing firms towards a common level of tax avoidance.

Keywords: governance, taxes, institutional ownership, regression discontinuity

Suggested Citation

Bird, Andrew and Karolyi, Stephen A., Governance and Taxes: Evidence from Regression Discontinuity (April 1, 2016). Available at SSRN: https://ssrn.com/abstract=2572683 or http://dx.doi.org/10.2139/ssrn.2572683

Andrew Bird

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Stephen Karolyi (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
4122682909 (Phone)

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