Independence or subservience? The role of independent co-opted directors in corporate tax avoidance

This study examines how the appointment of independent directors after a CEO assumes office (co-opted directors) affects corporate tax avoidance. While formally independent, such directors may be more aligned with the CEO, potentially weakening board oversight. Using a panel of 7084 U.S. firm-year observations from 2002 to 2022, we use tenure-weighted co-option measure and employ system GMM, entropy balancing, and a difference-in-differences approach to address endogeneity. We find that firms with higher proportions of co-opted independent directors exhibit significantly lower effective tax rates, indicating more aggressive tax behavior. This relationship is stronger in firms with weak governance, low board meeting attendance, and powerful CEOs. Notably, the audit committee's independence and expertise do not mitigate this effect. Our findings have important implications for capital markets governance, suggesting that formal director independence may not ensure accountability without structural safeguards against managerial influence in board appointments.