Does corporate tax avoidance promote managerial empire building?

Shams, Syed and Bose, Sudipta and Gunasekarage, Abeyratna (2022) Does corporate tax avoidance promote managerial empire building? Journal of Contemporary Accounting and Economics, 18 (1):100293. pp. 1-27. ISSN 1815-5669

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Abstract

We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Date Deposited: 18 Jan 2022 05:30
Last Modified: 18 Jan 2022 05:30
Uncontrolled Keywords: Tax avoidance; Empire building; Agency problems; Firm valuation
Fields of Research (2008): 15 Commerce, Management, Tourism and Services > 1599 Other Commerce, Management, Tourism and Services > 159999 Commerce, Management, Tourism and Services not elsewhere classified
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150299 Banking, Finance and Investment not elsewhere classified
Fields of Research (2020): 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3502 Banking, finance and investment > 350299 Banking, finance and investment not elsewhere classified
Identification Number or DOI: https://doi.org/10.1016/j.jcae.2021.100293
URI: http://eprints.usq.edu.au/id/eprint/45535

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