The Effect of State Antitakeover Laws on Corporate Tax Avoidance

51 Pages Posted: 7 Oct 2020

See all articles by Xinghua Gao

Xinghua Gao

Washington State University

Yonghong Jia

Iowa State University

Chansog (Francis) Kim

The State University of New York at Stony Brook

Date Written: May 15, 2020

Abstract

We examine the implications of enhanced managerial control afforded by state anti-takeover laws for tax avoidance and find the strength of anti-takeover statutes in a state is negatively related to tax avoidance of firms incorporated in that state. In testing underlying mechanisms, we find that the empirical results support the price discount concern hypothesis (i.e., managers refrain from tax avoidance activities to prevent potential stock price discounts induced by heightened investor perception of tax-related rent extraction in firms with severe agency problems). By contrast, the results are inconsistent with the quiet life hypothesis (i.e., managers entrenched by state anti-takeover protection enjoy the quiet life by under-investing in tax planning opportunities). Our findings are generally consistent with the takeover market phenomenon that one of managers' concerns lies in their inability to re-contract away the adverse consequences of perceived agency problems arising from state anti-takeover protection.

Keywords: Tax Avoidance; Managerial Control; State Anti-Takeover Laws; Agency Problems; Takeover Market

JEL Classification: M41, M48, G34, G18

Suggested Citation

Gao, Xinghua and Jia, Yonghong and Kim, Chansog (Francis), The Effect of State Antitakeover Laws on Corporate Tax Avoidance (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3601515 or http://dx.doi.org/10.2139/ssrn.3601515

Xinghua Gao

Washington State University ( email )

Department of Accounting
Carson College of Business
Pullman, WA 99163
United States

Yonghong Jia (Contact Author)

Iowa State University ( email )

ames, IA Iowa 50010
United States

Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

College of Business
Stony Brook, NY 11794
United States
5163040037 (Phone)
631-632-9412 (Fax)

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