For Whom (and For When) is the Firm Governed? The Effect of Changes in Corporate Fiduciary Duties on Tax Strategies and Earnings Management

European Financial Management, forthcoming

50 Pages Posted: 2 Aug 2021 Last revised: 5 Aug 2021

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University; Birmingham Business School; European Corporate Governance Institute (ECGI)

Bryce Tingle, QC

University of Calgary - Faculty of Law

Feng Zhan

Western University

Date Written: July 31, 2021

Abstract

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers’ duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that while the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms’ effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm’s effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviors in relation to shareholders, but do affect their behaviors in relation to the taxing authority. We argue that a change to fiduciary duties doesn’t appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short-term strategies that often impair long-term outcomes.

Keywords: tax aggressiveness, fiduciary duties, earnings management

JEL Classification: H26, G34

Suggested Citation

Cumming, Douglas J. and Tingle, Bryce and Zhan, Feng, For Whom (and For When) is the Firm Governed? The Effect of Changes in Corporate Fiduciary Duties on Tax Strategies and Earnings Management (July 31, 2021). European Financial Management, forthcoming, Available at SSRN: https://ssrn.com/abstract=3897031 or http://dx.doi.org/10.2139/ssrn.3897031

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://sites.google.com/view/douglascumming/bio?authuser=0

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/douglas-cumming

Bryce Tingle

University of Calgary - Faculty of Law ( email )

Murray Fraser Hall
2500 University Dr. N.W.
Calgary, Alberta T2N 1N4
Canada
1 (403) 220-8247 (Phone)

Feng Zhan (Contact Author)

Western University ( email )

1151 Richmond St
London, N6A 3K7
Canada

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