Corporate Culture and Tax Planning

Abstract

We study the effects of corporate culture on tax planning. Using the competing value framework and natural language processing techniques, we quantify internally oriented corporate cultural dimensions of control and collaboration. We predict that these dimensions influence intraorganizational knowledge flows in different ways that ultimately affect corporate tax planning. Hierarchical control cultures foster bureaucracy that negatively impacts intraorganizational knowledge flows and results in less optimal tax planning. In contrast, collaboration-oriented cultures embrace flat hierarchies that positively influence intraorganizational knowledge flows that result in more efficient tax planning. Our empirical findings are consistent with these predictions: firms with control-oriented (collaboration-oriented) cultures have higher (lower) GAAP and cash effective tax rates. We find some evidence that collaboration-oriented cultures achieve these corporate tax savings by engaging in aggressive tax shelters and that such tax savings enhance firm value.

Keywords: Corporate culture, competing value framework, text analysis, tax planning, tax sheltering, firm value

JEL Classification: H26, M14, M41