The Separation of Ownership and Control and Corporate Tax Avoidance
Coauthor(s): Brad Badertscher, Sonja Olhoft Rego.
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.
Source: Journal of Accounting and Economics
Badertscher, Brad, Sharon Katz, and Sonja Olhoft Rego. "The Separation of Ownership and Control and Corporate Tax Avoidance." Journal of Accounting and Economics 56, no. 2-3 (2013): 228-250.