Securities Litigation and Corporate Tax Avoidance

43 Pages Posted: 23 Nov 2019

See all articles by Matteo P. Arena

Matteo P. Arena

Marquette University

Bin Wang

Marquette University - College of Business Administration

Rong Yang

Rochester Institute of Technology

Date Written: November 2019

Abstract

We examine whether litigation risk is systematically related to corporate tax avoidance. We find that the exogenous reduction in the threat of securities class action litigation due to the 1999 ruling of the Ninth Circuit Court of Appeals effectively increases corporate tax avoidance, which is consistent with the notion that the threat of shareholder litigation plays a disciplinary role in curbing managerial rent extraction from tax avoidance activities. This finding is robust to alternative model specifications including two placebo tests and propensity score matching. We further find that labor union and alternative external governance mechanisms such as analyst coverage and institutional ownership mitigate this effect. Overall, our paper provides a significant contribution to the understanding of the relation between corporate governance and tax avoidance.

Keywords: securities class action litigation, corporate lawsuits, tax avoidance

JEL Classification: G30, H25, K22, K41

Suggested Citation

Arena, Matteo P. and Wang, Bin and Yang, Rong, Securities Litigation and Corporate Tax Avoidance (November 2019). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3485731

Matteo P. Arena (Contact Author)

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Bin Wang

Marquette University - College of Business Administration ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Rong Yang

Rochester Institute of Technology ( email )

Saunders College of Business
Rochester Institute of Technology
Rochester, NY 14623
United States

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