Failures in Corporate Governance: Can the Corporation Tax Improve Efficiency?

Vesa Kanniainen

FinanzArchiv: Public Finance Analysis, 1999, vol. 56, issue 3/4, 310-

Abstract: The well-known tax results obtained in the traditional model of investment are re-examined in a model of imperfect corporate governance. The corporation tax, the dividend tax and the capital gains tax have unconventional stock market and real effects which operate through the managerial compensation scheme. A risk-averse management has an incentive to overinvest, using the corporation as a savings instrument to enjoy private benefits and insure itself against income risks. Corporation tax may improve corporate governance and investment efficiency but only under small price uncertainty. Under larger price uncertainty, corporate investment operates as an insurance device, and efficiency gains are possible but less likely to materialize.

Date: 1999
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