What Is the Influence of Lead Independent Directors on Corporate Tax Policy?

Abstract

This paper examines the effect that lead independent directors serving on the board have on corporate tax policy. Through reviewing and approving board meeting agendas, lead independent directors (LIDs) could affect corporate tax policy by influencing the tax-related content in board meeting agendas. Through overseeing non-management directors' meetings and facilitating the communication between independent directors and CEO, LIDs could affect the information flow about corporate tax policy that reaches the CEO. We find that GAAP effective tax rates are higher for companies with lead independent directors, suggesting that lead independent directors serve as a corporate governance mechanism that limits aggressive corporate tax policy. The result is stronger for companies with a lower ratio of independent directors on the board, lower financial constraints, younger firms, and lower existing effective tax rates. In additional tests, We find a negative association between the presence of lead independent directors and tax volatility. We also find consistent results after controlling several lead independent directors’ characteristics that might influence corporate tax policy.