Tax Avoidance, Horizontal Agency Conflicts and High-Quality Auditing in Private Firms.

• In Event: The Effect of Audit Quality

Abstract

In this paper we investigate whether horizontal agency costs associated with concentrated ownership, CEO ownership and family ownership affect tax avoidance in private firms and whether high-quality auditing ameliorates these agency costs thereby enhancing tax avoidance. We rely on the theoretical framework developed by Desai and Dharmapala (2006) that embeds the tax sheltering decision within an agency context, and emphasizes the importance of interactions between rent diversion and tax sheltering. We argue that horizontal agency conflicts arising from ownership patterns in private firms hinder tax avoidance, but that high-quality auditing can ameliorate these agency costs leading to more tax avoidance, ceteris paribus. We use a large sample of Norwegian firms from 2000-2014 and our results provide support for the hypotheses that horizontal agency costs associated with ownership patterns in private firms hinder tax avoidance but that high-quality auditing ameliorates these agency conflicts and enhances tax avoidance in private firms.

Authors

• John Christian Langli, BI Norwegian Business School

• Marleen Willekens, KU Leuven