TY - JOUR
T1 - Does corporate tax avoidance promote managerial empire building?
AU - Shams, Syed
AU - Bose, Sudipta
AU - Gunasekarage, Abeyratna
N1 - Funding Information:
We express our sincere thanks to the reviewers for their insightful comments and suggestions.
Publisher Copyright:
© 2021 Elsevier Ltd
PY - 2022/4
Y1 - 2022/4
N2 - We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.
AB - We examine the association between corporate tax avoidance and empire building using 35,060 firm-year observations from the United States (US) for the period 1991–2015. We build a composite empire building measure by conducting a factor analysis on four popular empire building proxies used in the literature. We find a positive association between this composite measure and the four proxies used to represent the tax avoidance of firms in our sample. As our results suggest, agency problems are inflicted upon firms employing tax avoidance strategies which, in turn, facilitate managerial rent extraction through aggressiveness in growth and the accumulation of assets. Furthermore, the relationship of corporate tax avoidance to managerial empire building is found to be more pronounced in firms with weak governance, poor monitoring mechanisms, greater Chief Executive Officer (CEO) power and weak corporate social responsibility (CSR) performance. We also find that empire building-motivated tax avoidance leads to lower firm valuation. Our results remain insensitive even when employing several robustness tests.
KW - Agency problems
KW - Empire building
KW - Firm valuation
KW - Tax avoidance
UR - http://www.scopus.com/inward/record.url?scp=85122516570&partnerID=8YFLogxK
U2 - 10.1016/j.jcae.2021.100293
DO - 10.1016/j.jcae.2021.100293
M3 - Article
AN - SCOPUS:85122516570
SN - 1815-5669
VL - 18
JO - Journal of Contemporary Accounting and Economics
JF - Journal of Contemporary Accounting and Economics
IS - 1
M1 - 100293
ER -