Corporate Governance, Tax Avoidance, and Finance Constraints

In response to greater financial constraints and more costly external financing, firms may avoid corporate taxes to generate funds for investment. In that sense, outside investors may recognize tax management as a value-increasing activity, especially for a financially constrained firm. However, more aggressive tax avoidance may also be associated with increased opportunities for rent diversion by firm managers. Therefore, the impact of corporate tax avoidance on financial constraints is likely to depend on the strength of a firm’s corporate governance. In an article forthcoming in Financial Management [1],  we examine how corporate governance affects the relationship between a firm’s tax … Read more