“Is Tax Avoidance Associated with Managerial Rent Extraction from Shareholders Among Poorly Governed US Firms?”

Two influential papers in the tax avoidance literature (Desai and Dharmapala 2006 and Desai et al. 2007) argue that tax avoidance can be used to facilitate managerial rent extraction from shareholders. The most direct large sample empirical evidence in support of this theory comes from Russia, which has a much different regulatory and corporate governance environment than the United States, but subsequent studies on this theory focus on US firms. I test for large sample evidence that tax avoidance is associated with managerial rent extraction from shareholders in the US using three proxies for managerial rent extraction that represent the three types of decisions managers make: operating, investing and financing. I find no support for the contention that tax avoidance is associated with lower future performance or overinvestment. In contrast, I find a negative association between tax avoidance and payouts to common shareholders. I conclude that researchers should exercise more care when making predictions that assume a relation between rent extraction and tax avoidance without carefully considering the firms in their sample and the type of rent extraction that they expect to find. I am grateful to my committee members Terry Shevlin (chair), Weili Ge, and Jake Thornock for helpful comments and guidance. This paper has also benefited from helpful comments by Bob Bowen, Alex Edwards, Jared Jennings, Allison Koester, Dawn Matsumoto, D Shores, Lloyd Tanlu, and Ryan Wilson and participants at the University of Washington workshop. I also thank Brad Lindsey and Scott Dyreng for sharing data with me on firms’ subsidiaries. All errors that remain are my own.