The separation of ownership and control and corporate tax avoidance

Brad A. Badertscher, Sharon P. Katz and Sonja O. Rego

Journal of Accounting and Economics, 2013, vol. 56, issue 2, 228-250

Abstract: We examine whether variation in the separation of ownership and control influences the tax practices of private firms with different ownership structures. Fama and Jensen (1983) assert that when equity ownership and corporate decision-making are concentrated in just a small number of decision-makers, these owner-managers will likely be more risk averse and thus less willing to invest in risky projects. Because tax avoidance is a risky activity that can impose significant costs on a firm, we predict that firms with greater concentrations of ownership and control, and thus more risk averse managers, avoid less income tax than firms with less concentrated ownership and control. Our results are consistent with these expectations. However, we also consider a competing explanation for these findings. In particular, we examine whether certain private firms enjoy lower marginal costs of tax planning, which facilitate greater income tax avoidance. Our results are consistent with the marginal costs of tax avoidance and the separation of ownership and control both influencing corporate tax practices.

Keywords: Ownership structure; Agency costs; Tax avoidance; Private equity firms; Effective tax rates (search for similar items in EconPapers)
JEL-codes: G30 G32 H25 K34 M40 M49 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:56:y:2013:i:2:p:228-250

DOI: 10.1016/j.jacceco.2013.08.005

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