Two essays on the legal effect in shaping corporate policy

Abstract

Essay I Managerial Outside Job Opportunity Restriction and Corporate Tax Avoidance: Evidence from a Natural Experiment Abstract I examine the effect of managers’ outside job opportunities on corporate tax avoidance exploiting a natural experiment of staggered adoption of Inevitable Disclosure Doctrine (IDD) that limits the managers’ opportunities to join or form rival firms. I find that firms increase tax avoidance after the adoption of the IDD, as reflected in a lower Cash ETR and GAAP ETR, and a higher likelihood of using subsidiaries in tax haven countries. The effect of the IDD adoption on tax avoidance is generally more pronounced for firms with high effective tax rate before the adoption, for firms that operate in more homogeneous industries, and for firms that face lower IRS audit probability. Additional analysis shows that firm value also increases after the IDD adoption, especially for firms with high effective tax rate before the adoption year. Overall, the evidence suggests that job career concerns mitigate the problem of underinvestment in tax planning. Keywords: IDD; outside job opportunities; tax avoidance; firm value JEL Classification: H26; J62 Essay II Legal Ambiguity and Corporate Risk Taking: Evidence from a Natural Experiment Abstract I examine the impact of legal ambiguity on corporate risk taking exploiting a natural experiment of staggered creation of business court that reduces the legal ambiguity coexisting with shareholder litigation under state corporate law. I find that corporate risk taking significantly increases after the establishment of business court, and firms manage their risk profile through reallocating safety assets to risky investment, reducing working capital and maintaining higher degree of operating leverage. Additional analyses show that the increase in corporate risk taking is more pronounced for firms that face a higher ex-ante probability of takeover and firms that operate in more homogeneous industries. Overall, the evidence suggests that legal ambiguity has real effect in shaping corporate policy. Key words: business court; shareholder litigation; ambiguity aversion; risk taking JEL Classification: D81; D91; G32; K41

Date of Award	2019
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology