The Corporate Governance of Profit Shifting
40 Pages Posted: 26 Aug 2018 Last revised: 12 Nov 2019
Date Written: November 11, 2019
We examine profit shifting as the outcome of corporate governance characteristics of multinational enterprises (MNEs). Using a sample of 558 parent firms from 14 countries and 4,728 subsidiaries in 41 countries, we first measure profit shifting at the subsidiary-year level from the responses of subsidiary profits to exogenous parent earnings shocks. Subsequently, drawing on agency theories of the firm, we show that board structure and directors’ experience have an economically important effect on the aggressiveness of profit shifting. Using our baseline specification, a one-standard deviation change in these board characteristics implies an 11% total response in our measure of profit shifting. Our results have important implications for the understanding of the intra-group mechanics of international profit shifting.
Keywords: Corporate governance; Profit shifting; Board structure; Directors’ experience; CEO duality
JEL Classification: F23, H25, H26, H32, M41
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