Tax Enforcement, Corporate Governance, and Income Diversion: Evidence after Putin’s election in 2000

Using a direct estimate of income diversion for 156 firms from 1999 through 2004, we show that an increase in tax enforcement following the election of Vladimir Putin in 2000 is associated with a decrease in the appropriation of private rents by insiders in those firms investigated for tax evasion. We also find evidence consistent with a simultaneous spillover effect: the largest non-government controlled companies in Russia decrease income diversion even though they were not explicitly targeted as tax evaders. This effect is significant both economically and statistically after controlling for changes in firm-level corporate governance and it cannot be explained by trends in the general improvement of corporate governance in Russia during our sample period. Finally, we find no significant evidence of either substitution or complementarity between firms’ corporate governance and government’s tax enforcement vis-à-vis income diversion.