Corporate governance and tax avoidance: Evidence from governance reform

Abstract

We explore the association between corporate governance and tax avoidance in Mexico, a developing economy where the primary agency concern is between firm insiders and minority owners. The Mexican setting aligns with other non-U.S. settings and thus findings apply to a broad set of countries. We exploit governance reforms in Mexico and use a hand-collected governance index to show that improved corporate governance pushes tax avoidance toward a new equilibrium. In particular, we find evidence that Mexican firms with stronger governance engage in less tax avoidance and that our results are concentrated in family-owned firms and non-cross-listed firms, both of which have naturally weaker governance. Our findings suggest these governance reforms are effective in reducing tax avoidance, and we identify board independence and audit committees as mechanisms responsible for the decrease in tax avoidance.