For whom (and for when) is the firm governed? The effect of changes in corporate fiduciary duties on tax strategies and earnings management

• Published in: European financial management : the journal of the European Financial Management Association 2021-11, Vol.27 (5), p.775-813
• Main Authors: Cumming, Douglas, Tingle QC, Bryce C., Zhan, Feng
• Format: Article
• Language: English
• Subjects: Constituencies; Earnings; Earnings management; fiduciary duties; Fiduciary responsibility; Motivation; Statutes; Stockholders; tax aggressiveness; Tax rates; Taxation; Welfare
• ISSN: 1354-7798; 1468-036X
• DOI: 10.1111/eufm.12332

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers' duties from shareholders to a wide range of stakeholders, as a quasi‐natural experiment to determine the actual impact of fiduciary duties. We find that though the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms' effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm's effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviours in relation to shareholders but do affect their behaviours in relation to the taxing authority. We argue that a change to fiduciary duties does not appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short‐term strategies that often impair long‐term outcomes.