Securities Litigation and Corporate Tax Avoidance

Authors

Matteo Arena, Marquette UniversityFollow
Bin Wang, Marquette UniversityFollow
Rong Yang, Rochester Institute of Technology

Document Type

Article

Publication Date

2-2021

Publisher

Elsevier

Source Publication

Journal of Corporate Finance

Source ISSN

0929-1199

Abstract

We examine whether litigation risk is systematically related to corporate tax avoidance. We find that the exogeneous reduction in the threat of securities class action litigation due to the 1999 ruling of the Ninth Circuit Court of Appeals effectively increases corporate tax avoidance, which is consistent with the notion that the threat of shareholder litigation plays a disciplinary role in curbing managerial rent extraction from tax avoidance activities. This finding is robust to alternative model specifications including two placebo tests and propensity score matching. We further find that labor union and alternative external governance mechanisms such as analyst coverage and institutional ownership mitigate this effect. Overall, our paper provides a significant contribution to the understanding of the relation between corporate governance and tax avoidance.

Comments

Accepted version. Journal of Corporate Finance, Vol. 66 (February 2021): 101546. DOI. © 2021 Elsevier. Used with permission.

Recommended Citation

Arena, Matteo; Wang, Bin; and Yang, Rong, "Securities Litigation and Corporate Tax Avoidance" (2021). Finance Faculty Research and Publications. 140.
https://epublications.marquette.edu/fin_fac/140