The influence of governance infrastructure and corporate governance on profit shifting

In this article we develop a conceptual model to examine the influence of quality of country-level governance infrastructure and corporate governance effectiveness on profit shifting. We empirically test propositions derived from the model with a unique firm-level data set and using multiple indicat...

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Bibliographic Details
Published in:Journal of international business studies 2015-10, Vol.46 (8), p.886-916
Main Authors: Sugathan, Anish, George, Rejie
Format: Article
Language:English
Subjects:
Business and Management
Business Strategy/Leadership
Corporate governance
Corporate taxes
Externality
Host country
Incentives
Influence
Infrastructure
International Business
Management
Organization
Profit sharing plans
Profits
Stockholders
Tax rates
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Summary:In this article we develop a conceptual model to examine the influence of quality of country-level governance infrastructure and corporate governance effectiveness on profit shifting. We empirically test propositions derived from the model with a unique firm-level data set and using multiple indicators of governance infrastructure quality and corporate governance mechanisms. We estimate that on average about 6% of total pre-tax income is shifted out of foreign-owned firms in India. We show that governance infrastructure that improves collective action and transparency in both the foreign- and host-country reduces shifting. On the other hand, secure property rights and efficient contracting in the foreign country increases shifting. We also find that monitoring by foreign institutional investors restricts shifting.
ISSN:0047-2506
1478-6990
DOI:10.1057/jibs.2015.23