Finance and Financial Management Commons^™

Securities Litigation And Corporate Tax Avoidance, Matteo Arena, Bin Wang, Rong Yang

Finance Faculty Research and Publications

We examine whether litigation risk is systematically related to corporate tax avoidance. We find that the exogeneous reduction in the threat of securities class action litigation due to the 1999 ruling of the Ninth Circuit Court of Appeals effectively increases corporate tax avoidance, which is consistent with the notion that the threat of shareholder litigation plays a disciplinary role in curbing managerial rent extraction from tax avoidance activities. This finding is robust to alternative model specifications including two placebo tests and propensity score matching. We further find that labor union and alternative external governance mechanisms such as analyst coverage and …