Governance and Taxes: Evidence from Regression Discontinuity
55 Pages Posted: 4 Mar 2015 Last revised: 6 May 2016
Date Written: April 1, 2016
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
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