Inheritance tax, shareholder protection, and the market value of family firms: A cross‐country analysis

Abstract

Research Summary We examine the relationship among inheritance taxes, shareholder protection, and the family firms' market value. Drawing on the family firm, corporate governance, and institutional complementarities literature, we argue that inheritance taxes act as external corporate governance mechanisms for decoupling business families' socioemotional goals. However, this depends upon minority investor protections. In strong protection countries, the incentives for family self‐governance created by high inheritance taxes are offset by the loss of business family autonomy inherent in strong shareholder protection. Using a sample of 284 firms across 31 countries, we provide support for these arguments. Results suggest that inheritance and shareholder protection laws are substitutive external corporate governance mechanisms to align business family and nonfamily shareholders' interests. Managerial Summary We investigate how inheritance taxes and shareholder protection laws interact to generate several outcomes that can benefit or harm family firms' market value. We argue that high rates of inheritance taxes in a country push business families to focus more on firm value maximization and less on pursuing family‐centric goals, thus increasing firm value. However, we further argue that the positive role of inheritance taxes on family firms' market value weakens when the country also exhibits strong shareholder protection laws. Therefore, inheritance and shareholder protection laws substitute for one another when they intersect in business families. We find evidence consistent with these ideas when examining a sample of publicly traded firms across 31 countries. Our results corroborate that policymakers' concerns regarding the protection of minority shareholders must not consider only investor protection laws, but also how investor protection interact with other institutions such as inheritance law.

Private Firms and Offshore Finance

“…Accordingly, the empirical analysis is based on a sample of private firms. Second, the state can impact the owners' incentives for using offshore vehicles from many channels besides corporate taxation, such as inheritance law (Ortiz et al, 2021;, nationalization (Desai et al, 2007), and financial reporting (Brown et al, 2019). The incorporation of the first two channels is equivalent to a higher tax rate τ , while financial transparency regulation can be 3 Data and Methodology…”

Buy, borrow, die: how rich live off their paper wealth and avoid paying taxes and why we let them do it?

“…Inheritance tax design allows for the application of different tax rates and allowances linked to certain characteristics of the beneficiaries (Gross, C., Lorek, K. & Richter, F., 2016). Inheritance tax rates vary considerably across countries (Ortiz, M. et al, 2021). According to similarities existing across countries in the general concept of the tax, we can find differences concerning tax rates and exemptions.…”

“…and Kirchler, E. 2017). Inheritance taxes represent financial obligations that are part of the legal regime governing the transfer of assets to family heirs following the passing of a family member (Ortiz, M. et al, 2021).…”