We investigate whether tax avoidance and manager diversion are complementary when the costs of diversion are low by comparing dividend payouts, performance, and overinvestments of tax haven firms versus other multinational firms based in countries with weak and strong investor protections. Dharmapala (2006, 2009a, b) and Desai et al. (2007) set forth a theory of tax avoidance within an agency framework (the D&D theory) based on the assumption that tax avoidance and manager diversion are complementary when the corporate governance system is "ineffec-* Accepted by Lillian Mills. We thank workshop participants at réduire les coûts du détournement pour les gestionnaires de sociétés établies dans des pays où la protection des investisseurs est faible. À l'aide d'un échantillon tiré de 28 pays de base, elles recueillent des données établissant que le détournement par les gestionnaires et l'évitement fiscal sont complémentaires pour les sociétés recourant aux paradis fiscaux qui sont établies dans des pays où la protection des investisseurs est faible, mais non pour les sociétés recourant aux paradis fiscaux établies dans des pays où la protection des investisseurs est forte. Les résultats de l'étude confirment l'hypothèse de la complémentarité sous-jacente au modèle de Desai et Dharmapala et nous éclairent sur l'incidence potentielle de la décentralisation des sociétés mondiales. Contemporary Accounting Research
Risk oversight by the board of directors is a key component of a firm's enterprise risk management framework, and recently, boards have paid more attention to their firm's tax-planning activities. In this study, we use a hand-collected sample of proxy statement disclosures about the board's role in risk oversight and provide evidence that risk oversight is negatively associated with both tax uncertainty and overall tax burdens. We find that risk oversight is most strongly associated with positions that yield permanent tax benefits and also with less risky tax-planning activities. Overall, the evidence suggests that board risk oversight is associated with more effective tax-planning practices.
Incorporating the firm's corporate parent in a tax haven is a major decision that receives significant attention from many stakeholders, yet certain implications of this corporate strategy remain unclear. While tax haven incorporation offers tax savings, it also imposes risks that are potentially costly and hence important to consider. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens but that are primarily based in nonhaven countries. We also predict and find that the observed cost of equity premium is more pronounced in firms with greater tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our findings imply that an increased cost of capital is a material cost of tax haven parent incorporation. We contribute to the literatures on valuation of tax haven use, tax and nontax costs of corporate tax strategies, corporate inversions, and the relation between taxes and the cost of capital. Our study provides evidence on the tax and nontax risks of a uniquely observable tax strategy (i.e., tax haven parent incorporation) that could factor into firms' decisions about whether to incorporate in a tax haven and policymakers' efforts to deter such activity.
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