Sean T. McGuire

Dual Class Ownership and Tax Avoidance

This study investigates whether the agency conflicts inherent in a dual class ownership structure are associated with the level of firms’ tax avoidance. Dual class ownership presents a unique agency problem because insiders’ voting rights (i.e., insiders’ ability to control the firm) exceed their cash flow rights (i.e., insiders’ claim on the cash payouts of the firm). Thus, insiders control a majority of the votes of a firm despite having claims to a minority of the firm’s cash flows. We examine the levels of non-conforming and conforming tax avoidance for a sample of dual class firms. Among dual class firms, we find that the extent of non-conforming tax avoidance is declining as the difference between voting rights and cash flow rights increases. In addition, we find that the difference between voting rights and cash flow rights is associated with lower levels of conforming tax planning among dual class firms. We also compare the level of tax avoidance of dual class firms to other publicly traded firms and find that dual class firms engage in lower levels of non-conforming and conforming tax planning. These findings are consistent with the quiet life view, which suggests that when managers are insulated from takeover they avoid the costly effort associated with increased tax planning activities.

Sustainable Tax Strategies and Earnings Persistence

This study examines whether the sustainability of a firm’s tax strategy provides information about the persistence of a firm’s pre-tax earnings and earnings components. We also investigate whether investors are able to determine the sustainability of a firm’s tax strategy and use it as a signal to correctly price the persistence of a firm’s pre-tax earnings and earnings components. Sustainability is an additional dimension of a firm’s tax strategy that focuses on maintaining consistent tax avoidance outcomes over time. Consistent with the sustainability of a firm’s tax strategy providing unique information about earnings persistence and reflecting managers’ expectations of future earnings, we find that firms with more sustainable tax strategies exhibit more persistent pre-tax earnings and earnings components. We also find that investors are able to infer the sustainability of a firm’s tax strategy and use it as a signal to assess the persistence of pre-tax earnings and earnings components.

Forward-Looking Voluntary Disclosure in Proxy Contests

Using a unique, hand-gathered sample of 893 forward-looking voluntary disclosures by 70 proxy contest firms during 1992–2001, we examine whether managers temporarily alter the frequency and tone of their disclosures during proxy contests. Broadly consistent with the corporate control contest hypothesis, we find that, after controlling for performance and other determinants of disclosure, managers increase the frequency of forward-looking voluntary disclosures during the proxy contest relative to the pre-proxy period. After the proxy contest is resolved, managers decrease forward-looking voluntary disclosures. We also find that, after controlling for earnings-based performance and concurrent period stock returns, the voluntary forward-looking disclosure news is more positive, on average, during proxy contests relative to the pre-contest period. In addition, we find limited evidence that disclosure news is more positive during proxy contests relative to the post-contest period, suggesting that the more positive tone of the disclosures during proxy contests is temporary. Our results are robust to alternative estimation methods that model the endogeneity of the proxy contest event and to controlling for management tenure and turnover. In summary, proxy contest voluntary disclosure behavior is consistent with increased incentives to convince shareholders that managers are in control of the operating environment and to signal that poor past performance is transitory.