The Relationship between Board Interlocks and Corporate Tax Avoidance

Abstract

According to diffusion theory, network ties allow networked firms to learn vicariously from each other's experiences through the diffusion of new knowledge, and ties related to the transfer of tacit and complex knowledge, such as tax-planning strategies, are particularly beneficial. Since the knowledge of tax-planning strategies and experience in implementing tax-planning strategies can be shared among firms via their network ties, especially through board interlocks, following Brown and Drake (2014), this study evinces that a firm's tax avoidance behavior is related to its directorate ties to low-tax firms. Furthermore, this paper reveals that the influence of board interlocks on tax avoidance depends on certain characteristics of the firm's ties, such as ties formed by executive directors, ties to low-tax firms engaging the same auditor, and ties to the firm's low-tax family members. The empirical results of this study not only add evidence on network ties to the accounting literature but also can help explain part of the observed variation in corporate tax avoidance.