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Director and officer liability and corporate tax avoidance

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  • Sarfraz Khan
  • Sung‐Jin Park
  • Stanley Veliotis
  • John K. Wald

Abstract

We use the unique nature of the director and officer liability protection law applicable to Nevada incorporated firms to study how liability protection is related to corporate tax avoidance. We find that firms incorporated in Nevada avoid 32% more federal corporate tax as a fraction of total assets than firms incorporated in Delaware, and 40% more than firms incorporated in other states. Nevada‐incorporated firms have a 15% lower cash effective tax rate and an 8% lower GAAP ETR. The results are robust to various specifications including instrumental variable and matching approaches. Greater tax avoidance is also associated with lower payouts to shareholders for Nevada‐incorporated firms. The findings are consistent with theories about the complementarity of managerial diversion and tax avoidance for firms with poor monitoring, and they demonstrate how increases in liability protection lead to the unintended consequence of greater firm tax avoidance.

Suggested Citation

  • Sarfraz Khan & Sung‐Jin Park & Stanley Veliotis & John K. Wald, 2023. "Director and officer liability and corporate tax avoidance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(7-8), pages 1338-1371, July.
    • Handle: RePEc:bla:jbfnac:v:50:y:2023:i:7-8:p:1338-1371
    DOI: 10.1111/jbfa.12659
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    Cited by:

    1. Letdin, Mariya & Meegan, Cathryn M. & Romney, Miles A., 2024. "The Parabolic Relationship of Tax Avoidance and Cost of Public Debt," Finance Research Letters, Elsevier, vol. 69(PA).

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