Enterprise Risk Management and Corporate Tax Planning

Abstract

This study examines the impact of enterprise risk management (ERM) programs on corporate tax planning. ERM is a holistic approach to managing an enterprise’s entire portfolio of risks (COSO 2004, 2017). We expect that enhanced coordination across business units as a result of ERM allows firms to exploit tax avoidance opportunities and increase tax effectiveness. We hand-collect data on ERM adoption for a sample of S&P 500 firms from 1993 to 2016. We empirically document that firms with ERM programs have lower cash effective tax rates (ETRs) and higher tax effectiveness than firms without ERM. Additionally, we find that the relation between ERM and tax avoidance is stronger among firms with greater opportunities to benefit from ERM adoption through optimal resource allocation, improved external communication, and increased internal coordination and communication.

Keywords: Enterprise Risk Management (ERM), Tax Avoidance, Tax Effectiveness, Tax Planning, Financial Constraints

JEL Classification: G32, H25, M41