Does Corporate Tax Avoidance Promote Managerial Empire Building?

Journal of Contemporary Accounting & Economics, 18(1):1-27

55 Pages Posted: 23 Nov 2021 Last revised: 6 Dec 2021

See all articles by Syed Shams

Syed Shams

University of Southern Queensland

Sudipta Bose

Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Australia

Abey Gunasekarage

Monash University; Monash University

Date Written: November 21, 2021

Abstract

We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.

Keywords: Tax avoidance; Empire building; Agency problems; Firm valuation

JEL Classification: G32, G34

Suggested Citation

Shams, Syed and Bose, Sudipta and Gunasekarage, Abeyratna, Does Corporate Tax Avoidance Promote Managerial Empire Building? (November 21, 2021). Journal of Contemporary Accounting & Economics, 18(1):1-27, Available at SSRN: https://ssrn.com/abstract=3968575

Syed Shams

University of Southern Queensland

P.O.Box 238 Darling Heights
Toowoomba, Queensland 4350
Australia

Sudipta Bose

Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Australia ( email )

Sydney
Australia

HOME PAGE: http://www.newcastle.edu.au/profile/sudipta-bose

Abeyratna Gunasekarage (Contact Author)

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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