Fariz Huseynov, Ph.D. and his co-authors (Onur Bayar, University of Texas at San Antonio and Sabuhi H. Sardarli, Kansas State University) have had their paper “Corporate Governance, Tax Avoidance, and Financial Constraints” accepted for publication at Financial Management. In addition, this paper also appears on Columbia University Law School’s blog.
We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.