Defying the tone at the top: An analysis on the effects of board characteristics on the level of tax avoidance

In the Philippines poor tax collection has led to chronic fiscal deficits. Part of this problem can be attributed to the increasing prevalence of tax avoidance by multinational companies. A way to mitigate this tax avoidance problem is through improvement in corporate governance. Researchers argue that good corporate governance mechanisms (e.g. the structure of the board of directors) play a significant role in ensuring that management acts in the best interest of shareholders and may reduce corporate tax avoidance. Specifically, based on an agency theory argument, the presence of a more independent and diverse board can lead to better corporate monitoring and diminished corporate tax avoidance. In contrast, based on a resource dependency argument, it is posited that firms with a more independent, older, and business-educated board are more likely to engage in tax avoidance because these directors have the requisite experience and expertise necessary to implement complex tax avoidance strategies.

In this paper we examine the effect of board characteristics on the incidence of tax avoidance by 1,502 Philippine firms during the period 2003 to 2015. Our data comes from the Thomson Reuters Eikon database. We use residual book-tax gap, the cash-effective tax rate, and the long-run effective tax rate to proxy for corporate tax avoidance. Board characteristics include board size, board age, board independence, CEO-Chair duality, gender diversity, and the educational background of directors. We employ a two-step Blundell-Bond System Generalized Method of Moments (GMM) estimation technique to address endogeneity issues that may confound the relationship between board structure and the level of a firm’s tax avoidance. We find no significant relationship between board characteristics and tax avoidance, as measured by the long-run cash effective tax rates. However, consistent with agency and resource dependency theories, we find that board age is positively related with corporate tax avoidance, and that board independence and the proportion of board members with post-graduate degrees in Business and Economics have a negative and positive relationship, respectively, on corporate tax avoidance. Our findings suggest that increasing the number of independent directors and reducing the number of older directors on boards of Philippine firms may help reduce corporate tax avoidance.