The Effects of Anti-takeover Provisions on Book-Tax Differences

This study examines whether corporate governance has an influence on tax avoidance. Specifically, this study examines whether corporate governance reflected in the anti- takeover provisions is associated with the level of corporate tax avoidance measured as book-tax differences from Manzon and Plesko (2002) and Desai and Dharmapala (2006). Using a sample of US firms for the period of 1990-2007, we find a positive relation between anti-takeover provisions and the magnitude of tax avoidance at the firm level. This evidence suggests that firms without anti-takeover provisions are less likely to engage in tax avoidance activities, implying that corporate governance can play a role in monitoring tax avoidance. We also examine this issue from an investor perspective and provide weak evidence that firm value is more likely to decrease as corporate tax avoidance increases for firms with poor governance, consistent with the view that the market incorporates potential managerial diversion of cash flow from tax avoidance at the expense of shareholders into stock prices. Overall, our paper provides empirical evidence that corporate governance is an important determinant of book-tax differences.