Corporate Governance and Tax Avoidance: Evidence from Governance Reform

55 Pages Posted: 8 Jun 2021

See all articles by Jon N. Kerr

Jon N. Kerr

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Richard A. Price

University of Oklahoma

Francisco J. Román

University of Southern California

Miles A. Romney

Florida State University

Date Written: May 28, 2021

Abstract

Prior literature struggles to find evidence in U.S. settings to support the Desai and Dharmapala (2006) theory on how corporate governance affects tax avoidance. Most studies rely on equity incentive compensation as their governance proxy. We use a Mexican setting to examine this association and find firms with stronger governance engage in less tax avoidance. We rely on both a hand-collected governance index and governance reform to show improved corporate governance pushes tax avoidance toward a new equilibrium. Supplementary analyses show associations between governance and tax avoidance are greatest for tax-cost-sensitive family-owned firms and non-cross-listed firms with naturally weaker governance. A one standard deviation increase in governance corresponds to an increase of between one and three percentage points in a firm’s effective tax rate. Our findings suggest these governance reforms effectively reduce rent extraction by majority shareholders and identify Board independence and audit committees as channels responsible for decreased tax avoidance.

Keywords: Corporate governance, governance reform, tax avoidance, tax reform, family ownership

JEL Classification: G34, G32, H2

Suggested Citation

Kerr, Jon N. and Price, Richard A. and Román, Francisco J. and Romney, Miles A., Corporate Governance and Tax Avoidance: Evidence from Governance Reform (May 28, 2021). Available at SSRN: https://ssrn.com/abstract=3861965 or http://dx.doi.org/10.2139/ssrn.3861965

Jon N. Kerr

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-2698 (Phone)

Richard A. Price

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-5759 (Phone)

Francisco J. Román

University of Southern California

3660 Trousdale Parkway, ACCT 209
Los Angeles, CA 90089-0441
United States

Miles A. Romney (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

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