Does board co-option affect corporate tax avoidance?

Our study examines the association between board co-option and corporate tax avoidance using a large sample of publicly listed firms in the United States (U.S.) during the period 1997–2019. We find that a positive relationship exists between co-opted directors (those who join a board after the Chief Executive Officer [CEO] takes office) and corporate tax avoidance. This result remains consistent when we utilize exogenous CEO turnover in the difference-in-differences framework. Our results are more pronounced in a subsample of firms exposed to an environment with a lower level of monitoring. We also show that, through a CEO's equity portfolio's sensitivity to changes in stock return volatility, co-option affects tax-avoidance practices within a firm. Our final test reveals that tax avoidance is not a value-creating activity which occurs when managers are poorly monitored. Our study's findings contribute to the debate on the relative costs and benefits of board co-option and have important implications for regulators, policymakers, investors, and firms.