Monitoring and Tax Planning – Evidence from State-Owned Enterprises

This study provides new evidence on the association of state ownership and tax planning by showing that a shareholder’s monitoring incentives affect a firm’s tax planning. Using the unique setting of the German fiscal federalism, where both the federal and local governments levy a significant corporate income tax, we distinguish between state owners that directly benefit from state-owned enterprises’ (SOEs’) income tax payments and those that do not. Our results indicate that state ownership is associated with less tax planning, but only for SOEs where the state owner directly benefits from higher tax payments. These results are robust to various specifications and suggest that shareholders’ monitoring incentives are a determinant of a firm’s tax planning activities.