What Is the Influence of Lead Independent Directors on Corporate Tax Policy?

Abstract

In response to corporate governance criticisms from the shareholders, companies voluntarily adopt lead independent directors, a board-of-directors position, to improve corporate governance. Recent research suggests investors positively react to companies' announcement of establishing a lead independent director position because investors believe lead independent directors will reduce agency costs or enhance corporate governance. We find that GAAP effective tax rates are higher for companies with lead independent directors suggesting that lead independent directors have incremental monitoring influence over general board independence on corporate tax policy. Using path analysis, we also find a significant association between lead independent director positions and higher investor valuation through higher GAAP effective tax rates. These results suggest that investors value the corporate governance role of lead independent directors. We also find that investors, on average, favor the more conservative tax policies of companies with lead independent directors. This appreciation of more conservative tax policies is more pronounced when investors understand companies’ tax-related information and companies’ tax policies produce effective tax rates closer to their industry-size quintile mean. We validate our inferences that shareholders value the monitoring influence of lead independent directors on corporate tax policy through decreasing the litigation risk in subsequent periods. Finally, we find a significant association between lead independent directors and higher investor valuation, leading to a lower executive turnover. Overall, our results reveal that investors value the conservative monitoring of corporate tax policy. Our results are robust to entropy balancing and change analysis.