Are Family Firms More Tax Aggressive Than Non-Family Firms?
TL;DR: This paper found that family firms are less tax aggressive than their non-family counterparts, ceteris paribus, and that family owners are willing to forgo tax benefits in order to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders' concern with family rent-seeking masked by tax avoidance activities.
Abstract: Taxes represent a significant cost to the firm and shareholders, and it is generally expected that shareholders prefer tax aggressiveness. However, this argument ignores potential non-tax costs that can accompany tax aggressiveness, especially those arising from agency problems. Firms owned/run by founding family members are characterized by a unique agency conflict between dominant and small shareholders. Using multiple measures to capture tax aggressiveness and founding family presence, we find that family firms are less tax aggressive than their non-family counterparts, ceteris paribus. This result suggests that family owners are willing to forgo tax benefits in order to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders' concern with family rent-seeking masked by tax avoidance activities (Desai and Dharmapala 2006). This inference is further strengthened by our finding that family firms without long-term institutional investors (as outside monitors) and family firms expecting to raise capital exhibit even lower tax aggressiveness. Our result is also consistent with family owners being more concerned with the potential penalty and reputation damage from an IRS audit than non-family firms. We obtain similar inferences when using a small sample of tax shelter cases.
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TL;DR: In this article, the tax impact of foreign investors' interests within a host developing economy was examined, and the analysis of the dynamic panel data with a system GMM estimator showed significant positive relationships between foreign investors interests and the measures of corporate tax avoidance among large Malaysian companies.
3,631 citations
TL;DR: In this paper, the authors examine how family firms differ from non-family firms along five broad categories of managerial decisions, including management processes, firm strategies, corporate governance, stakeholder relations and business venturing.
Abstract: A growing body of research shows that family firms are different from other organizations in significant ways. In this paper we review this literature by examining how family firms differ from nonfamily firms along five broad categories of managerial decisions. These categories encompass a set of key organizational choices concerning management processes, firm strategies, corporate governance, stakeholder relations and business venturing. We argue that socioemotional wealth or affective endowment of family owners explain many of these choices. We also examine some contingency factors (namely family stage, firm size, firm hazard, and the presence of nonfamily shareholders) that moderate the influence of socioemotional wealth preservation as a point of reference when making managerial decisions in family firms. Lastly, we explore the firm performance consequences of family ownership.
1,381 citations
Cites background from "Are Family Firms More Tax Aggressiv..."
...The identity of family members is closely linked to the firm, which often carries their name (Dyer & Whetten, 2006 ), and how others perceive the firm directly affects the image and reputation of family owners (Chen, Chen, Cheng, & Shevlin, 2010 )....
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Posted Content•
TL;DR: In this article, a large sample of U.S. firms for the period 1995-2008 was used to show that corporate tax avoidance is positively associated with firm-specific stock price crash risk, which is consistent with the following view: tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors.
Abstract: Using a large sample of U.S. firms for the period 1995-2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.
1,075 citations
Cites background from "Are Family Firms More Tax Aggressiv..."
...Chen et al. (2010) find that family firms are less tax aggressive than their non-family counterparts....
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...In an agency theory framework, recent research argues that tax avoidance activities can facilitate managerial opportunism, such as earnings manipulation and outright resource diversion (Chen et al., 2010; Desai and Dharmapala, 2006, 2009a)....
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...This measure is intended to pick up the permanent component of book-tax 18 Other papers that use factor analysis to measure tax aggressiveness include Chen et al. (2010) and Lennox et al. (2010)....
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Posted Content•
TL;DR: In this paper, the authors examined the effect of equity risk incentives on corporate tax aggressiveness and found that larger equity risk incentive is associated with higher tax risk. But, they did not find that the magnitude of this effect is economically significant.
Abstract: This study examines equity risk incentives as one determinant of corporate tax aggressiveness. Prior research finds that equity risk incentives motivate managers to make risky investment and financing decisions, since risky activities increase stock return volatility and the value of stock option portfolios. Aggressive tax strategies involve significant uncertainty and can impose costs on both firms and managers. As a result, managers must be incentivized to engage in risky tax avoidance that is expected to generate net benefits for the firm and its shareholders. We predict that equity risk incentives motivate managers to undertake risky tax strategies. Consistent with this prediction we find that larger equity risk incentives are associated with greater tax risk and the magnitude of this effect is economically significant. Our results are robust across four measures of tax risk, but do not vary across several proxies for strength of corporate governance. We conclude that equity risk incentives are a significant determinant of corporate tax aggressiveness.
592 citations
TL;DR: In this paper, the authors present a review of tax research, focusing on four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing.
Abstract: In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research.
584 citations
Cites background or methods from "Are Family Firms More Tax Aggressiv..."
...Firms with concentrated ownership, such as the family firms examined in Chen et al. (2010), may avoid more taxes because controlling owners benefit more from the savings....
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...We use the Chen et al. (2010) paper discussed above as an example....
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References
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TL;DR: In this paper, the authors show that standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993), and these large standard errors are the result of uncertainty about true factor risk premiums and imprecise estimates of the loadings of industries on the risk factors.
6,064 citations
"Are Family Firms More Tax Aggressiv..." refers background in this paper
...42 Table 1 (Continued) Panel B Industry distribution of sample firm-years, by firm type Industry (per Fama and French 1997) Non-family firms frequency Family firms frequency % of family firms Food products 41 42 51% Recreational products 5 24 83% Printing and publishing 20 49 71% Consumer goods 48…...
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TL;DR: The authors investigated the relation between founding-family ownership and firm performance and found that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity.
Abstract: We investigate the relation between founding-family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure. FOUNDING-FAMILYOWNERSHIPAND CONTROL in public U.S. firms is commonly perceived as a less efficient, or at the very least, a less profitable ownership structure than dispersed ownership. Fama and Jensen (1983) note that combining ownership and control allows concentrated shareholders to exchange profits for private rents. Demsetz (1983) argues that such owners may choose nonpecuniary consumption and thereby draw scarce resources away from profitable projects. Shleifer and Vishny (1997) observe that the large premiums associated with superiorvoting shares or control rights provide evidence that controlling shareholders seek to extract private benefits from the firm. More generally, firms with large, undiversified owners such as founding families may forgo maximum profits because they are unable to separate their financial preferences with those of outside owners.1 Families also often limit executive management positions to family
4,923 citations
TL;DR: In this article, the authors used proxy data on all Fortune 500 firms during 1994-2000 and found that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO.
Abstract: Using proxy data on all Fortune 500 firms during 1994-2000, we establish that, in order to understand whether and when family firms are more or less valuable than nonfamily firms, one must distinguish among three fundamental elements in the definition of family firms: ownership, control, and management. Specifically, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Control mechanisms including dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings further suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.
3,312 citations
"Are Family Firms More Tax Aggressiv..." refers methods in this paper
...Prior research (e.g., Anderson and Reeb 2003; Villalonga and Amit 2006) finds that having a family-member CEO can further increase family control....
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TL;DR: The authors found that the classic owner-manager conflict in non-family firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms, and that the conflicts between family shareholders in descendant- CEO firms are more costly.
2,857 citations
TL;DR: This article examined the impact of measuring accruals as the change in successive balance sheet accounts, as opposed to measuring the accruality directly from the statement of cash flows. But their primary finding is that studies using a balance sheet approach to test for earnings management are potentially contaminated by measurement error in accrual estimates.
Abstract: This paper examines the impact of measuring accruals as the change in successive balance sheet accounts, as opposed to measuring accruals directly from the statement of cash flows. Our primary finding is that studies using a balance sheet approach to test for earnings management are potentially contaminated by measurement error in accruals estimates. In particular, if the partitioning variable used to indicate the presence of earnings management is correlated with the occurrence of mergers and acquisitions or discontinued operations, tests are biased and researchers are likely to erroneously conclude that earnings management exists when there is none. Additional results show that the errors in balance sheet accruals estimation can confound returns regressions where discretionary and non-discretionary accruals are used as explanatory variables. Moreover, we demonstrate that tests of market mispricing of accruals will be understated due to erroneous classification of “extreme” accruals firms.
1,368 citations