TAX AGGRESSIVENESS, TAX ENVIRONMENT CHANGES, AND CORPORATE GOVERNANCE

114 Pages·2008·1.14 MB·English

TAX AGGRESSIVENESS, TAX ENVIRONMENT CHANGES, AND CORPORATE
GOVERNANCE

By

CARLOS ERIEL JIMÉNEZ-ANGUEIRA

A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA

2008
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© 2008 Carlos Eriel Jiménez-Angueira

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To God for my health and my family; to Mariana, my love, for your unconditional love,
dedication, and endless care; to Pilín for being around while I went through this adventure; to
Papi and Mami for teaching me the value of a good education and hard work; and to Duncan—
you are a bunch of joy.

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ACKNOWLEDGMENTS
I am grateful to Bipin Ajinkya and Gary McGill for co-chairing my dissertation and to the
remaining members of my committee (Vicki Dickinson, Sarah Hamersma, and Sandy Kramer)
for their support and guidance. I also wish to acknowledge helpful comments and suggestions
from Monika Causholli, Mike Donohoe, Jason MacGregor, Nathan Stuart, and Adamos Vlittis
on prior versions of this research. I would like to thank the workshop participants at the
University of Florida, Florida International University, the University of Texas at San Antonio,
the University of Illinois at Chicago, and the University of North Texas for helpful comments
and suggestions. Special thanks go to Professor John Graham for making available his simulated
marginal tax rates for this project. I gratefully acknowledge the financial support provided by the
KPMG Foundation through its Minority Doctoral Scholarship and the American Institute of
Certified Public Accountants through its Minority Doctoral Fellowship.
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TABLE OF CONTENTS

page
ACKNOWLEDGMENTS ............................................................................................................... 4
LIST OF TABLES .......................................................................................................................... 7
LIST OF FIGURES ......................................................................................................................... 9
ABSTRACT .................................................................................................................................. 10
CHAPTER
1 INTRODUCTION ................................................................................................................. 12
2 BACKGROUND AND THEORETICAL DEVELOPMENT ............................................... 17
United States Tax Environment: Late 1990s through Mid–2000s ......................................... 17
Theoretical Development ....................................................................................................... 20
Research Questions ................................................................................................................ 24
3 IDENTIFICATION STRATEGY AND OPERATIONALIZATION OF
THEORETICAL CONSTRUCTS ......................................................................................... 28
Identifying Tax Environment Regimes .................................................................................. 28
Operationalization of Tax-Aggressiveness ............................................................................ 29
Book-Tax Difference as a Proxy for Tax-Aggressiveness ............................................. 29
Current Year Cash ETR: An Alternative Proxy for Tax-Aggressiveness ...................... 31
Operationalization of Corporate Governance Strength .......................................................... 33
Primary Measures of Corporate Governance Strength ................................................... 33
Comprehensive Corporate Governance Strength Measure ............................................. 35
4 DATA AND DESCRIPTIVE STATISTICS ......................................................................... 37
Sample Selection .................................................................................................................... 37
Descriptive Statistics .............................................................................................................. 38
5 EFFECT OF THE INTERACTION BETWEEN THE TAX ENVIRONMENT AND
CORPORATE GOVERNANCE ON TAX AGGRESSIVENESS ........................................ 45
Hypothesis .............................................................................................................................. 45
Method ................................................................................................................................... 45
Results .................................................................................................................................... 50
Descriptive Statistics ....................................................................................................... 50
Univariate Correlations ................................................................................................... 53
Multivariate Results ........................................................................................................ 53
Using Cash ETR as an Alternative Proxy for Tax-Aggressiveness ................................ 56
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Descriptive statistics on cash ETR .......................................................................... 56
Multivariate results using cash ETR as the dependent variable .............................. 58
Using the Comprehensive Corporate Governance Strength Measure to Test H ........... 58
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Univariate analyses .................................................................................................. 58
Multivariate results using the comprehensive corporate governance strength
measure ................................................................................................................ 59
Sensitivity Tests .............................................................................................................. 60
Discussion .............................................................................................................................. 61
6 INVESTORS’ VALUATION OF TAX AGGRESSIVENESS CONDITIONAL ON
THE TAX ENVIRONMENT AND CORPORATE GOVERNANCE ................................. 78
Hypotheses ............................................................................................................................. 78
Method ................................................................................................................................... 80
Results .................................................................................................................................... 82
Descriptive Statistics ....................................................................................................... 82
Multivariate Results ........................................................................................................ 83
Secondary Analyses ........................................................................................................ 84
Valuation tests using cash ETR as the proxy for tax-aggressiveness ...................... 84
Using the comprehensive corporate governance strength measure to test H ....... 85
2B
Sensitivity Tests .............................................................................................................. 85
Discussion .............................................................................................................................. 86
7 CONCLUDING REMARKS AND FUTURE RESEARCH ................................................. 94
APPENDIX
A BOARD OF DIRECTORS STRENGTH SCORE................................................................. 98
B BACKGROUND ON SHAREHOLDER RIGHTS INDEX ............................................... 102
C VARIABLE MEASUREMENT .......................................................................................... 104
D DISCRETIONARY ACCRUALS ESTIMATION .............................................................. 106
LIST OF REFERENCES ............................................................................................................ 107
BIOGRAPHICAL SKETCH ...................................................................................................... 114

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LIST OF TABLES
Table page

4-1 Data set construction detail ............................................................................................... 41
4-2 Distribution of sample by industry and governance classification ................................... 42
4-3 General descriptive statistics ............................................................................................. 43
4-4 Weak-governance variables .............................................................................................. 44
5-1 Descriptive statistics of variables used in the tax-aggressiveness level analyses ............. 64
5-2 Estimated book-tax difference behavior ........................................................................... 65
5-3 Differences in mean btd across regulation periods and governance classification ........... 66
5-4 Descriptive statistics by governance classification ........................................................... 67
5-5 Pearson correlation coefficients of variables used in the tax-aggressiveness level
analyses ............................................................................................................................. 68
5-6 Fixed-effects regressions of btd on tax environment changes and corporate
governance strength........................................................................................................... 69
5-7 Descriptive statistics on cashetr ........................................................................................ 70
5-8 Differences in mean cashetr across regulation periods and governance classification .... 71
5-9 Fixed-effects regressions of cashetr on tax environment changes and corporate
governance strength........................................................................................................... 72
5-10 Differences in mean btd and cashetr across regulation periods and govscore
classification ...................................................................................................................... 73
5-11 Descriptive statistics by govscore classification ............................................................... 74
5-12 Fixed-effects regressions of tax-aggressiveness (btd, cashetr) on tax environment
changes and govscore ........................................................................................................ 75
6-1 Descriptive statistics of variables used in the valuation analyses ..................................... 89
6-2 Pearson correlation coefficients of variables used in the valuation analyses .................... 90
6-3 Regressions of price on btd, tax environment changes, and corporate governance
strength .............................................................................................................................. 91
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6-4 Regressions of price on cashetr, tax environment changes, and corporate governance
strength .............................................................................................................................. 92
6-5 Regressions of price on tax-aggressiveness (btd, cashetr), tax environment changes,
and govscore ...................................................................................................................... 93
A-1 Descriptive statistics of BOD and AC attributes ............................................................. 101
B-1 Distributional characteristics of the shareholder rights index ......................................... 103
C-1 Variable measurement ..................................................................................................... 104
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LIST OF FIGURES
Figure page

2-1 Marginal benefits and costs of tax-aggressiveness: shareholders vs. managers. .............. 25
5-1 Estimated gross book-tax difference behavior .................................................................. 76
5-2 Cash ETR behavior ........................................................................................................... 77

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Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy

TAX AGGRESSIVENESS, TAX ENVIRONMENT CHANGES, AND CORPORATE
GOVERNANCE
By
Carlos Eriel Jiménez-Angueira

August 2008

Chair: Gary McGill
Cochair: Bipin Ajinkya
Major: Business Administration

This study presents an empirical examination of how the level of tax-aggressiveness—and
the related market valuation—was affected by the tax environment changes of the earlier part
this decade conditional on firms’ ex ante governance strength. This research question is
important because in the U.S. corporate environment—due to the separation of ownership and
control—the interaction between the tax environment and a firm’s corporate governance strength
may determine the firm’s level of tax-aggressiveness and whether the benefits of tax-aggressive
behavior accrue to the firm’s shareholders or its managers.
The analyses used a pre- and post-tax-environment-changes design for the period from
1997 to 2005 (excluding years 2001–2002) on an unbalanced panel of 436 U.S. firms, where the
effects of the tax environment changes were conditioned on firms’ governance strength prior to
the regulatory changes. The years from 2003 to 2005 were identified as the high-regulation
period while years 1997 to 2000 were identified as the low-regulation period. The main analyses
used the book-tax difference as a proxy for tax-aggressiveness.
In general, the results suggest that firms with ex ante low shareholder protection and/or
low levels of monitoring by sophisticated investors and/or weak board of directors reduced their
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