Bank affiliated directors and firm accounting policy: evidence from tax avoidance

Abstract

Purpose

We aim to empirically investigate the effect of affiliated banker directors (ABDs) on corporate tax avoidance. Furthermore, we conduct cross-sectional analyses on the impact of ABDs and explore the underlying mechanisms through which ABDs might influence corporate tax avoidance.

Design/methodology/approach

Using a large sample between 1999 and 2016, we empirically examine the impact of ABDs on corporate tax avoidance. We address the endogeneity concerns through an instrumental variable approach and robustness tests with alternative measures of ABDs and corporate tax avoidance.

Findings

Our results demonstrate that firms with ABDs exhibit lower levels of corporate tax avoidance. This negative association persists after controlling for potential endogeneity issues and is robust to alternative measures. We further document that the negative effect is stronger when firms are more bank-dependent and financially constrained. Our results indicate that ABDs limit corporate tax avoidance by strengthening corporate governance, mitigating information risks and protecting their reputational capital.

Originality/value

This research extends the existing literature by exploring the influence of ABDs on corporate accounting policies, particularly tax avoidance. These findings enhance our understanding of how directors’ banking experience bolsters corporate governance, information transparency and reputation, ultimately safeguarding stakeholder interests. This paper offers valuable implications for both financial practitioners and policymakers.

Citation

Li, H., Shen, H., Wang, B. and Wang, H. (2024), "Bank affiliated directors and firm accounting policy: evidence from tax avoidance", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-09-2024-0706