Tax-motivated income shifting and board structure: Evidence from Korean business groups

Abstract

This study investigates whether corporate governance protects the interests of all shareholders when Korean business groups implement the practice of tax-motivated income shifting. Income transfer among affiliated firms can be an optimal tax strategy for a business group as a whole. However, such a strategy may not benefit all shareholders of related firms, especially the minority shareholders of those whose profits are shifted out. This study examines whether the structure of affiliates’ boards plays a monitoring role for their shareholders in situations where the affiliates’ interests conflict with those of the business group. Results suggest that the structure of Korean business groups’ board of directors fails to discourage tax-induced income shifting activities, except for the existence of accounting or finance experts. Overall, our findings highlight the need to improve corporate governance to more effectively protect the minority shareholders of Korean business groups.