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The relationship between corporate governance and tax avoidance - evidence from Germany using a regression discontinuity design

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  • Kiesewetter, Dirk
  • Manthey, Johannes

Abstract

This paper analyses the relationship between corporate governance and tax avoidance. We use a regression discontinuity design (RDD) in a two-stage instrumental variable and take advantage of the exogenous variation in the index membership around the DAX and MDAX threshold. We suppose the differences in corporate governance result from the valueweighted composition of the market capitalization-based indexes. We find a significant discontinuity in the level of the corporate governance characteristics at the cutoff. The largest MDAX firms show stronger corporate governance characteristics compared to the smallest DAX firms. Our analysis shows that strong corporate governance characteristics drive down the effective tax rate for the DAX firms. This paper contributes to existing research by establishing a causal relationship between governance and taxes. This research aims to highlight the wide-ranging effects of institutional investors, which channel in corporate policy, in our case tax management.

Suggested Citation

  • Kiesewetter, Dirk & Manthey, Johannes, 2017. "The relationship between corporate governance and tax avoidance - evidence from Germany using a regression discontinuity design," arqus Discussion Papers in Quantitative Tax Research 218, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:218
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    More about this item

    Keywords

    Tax Avoidance; Corporate Governance; RDD; Regression Discontinuity Design;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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