Executive-level internal governance and tax planning

Abstract

We examine whether executive-level internal governance affects the extent of tax avoidance in U.S. firms. Internal governance includes processes through which subordinate executives provide checks and balances in firms’ decision-making processes (Cheng et al. 2016). We use a combined empirical measure of the relative length of the key subordinate executives’ decision horizons and their relative influence compared to their respective CEOs to proxy for the strength of subordinate executives’ roles in firms’ internal governance structures. We find that cross-sectional differences in internal governance strength explain differences in proxies of firm-level tax planning. Specifically, we find that firms are more likely to engage in tax strategies that will reduce both short-term and long-term effective tax rates when executive-level internal governance is more robust.