“Executive Fiduciary Duty and Corporate Tax Avoidance: Evidence from a Delaware Case Ruling” by Professor Qiang Cheng
Professor Qiang Cheng
School of Accountancy
Singapore Management University
A 2009 Delaware court ruling extended fiduciary duties to executives, including chief financial officers (CFOs), who are not on their companies’ board of directors. Exploiting this natural experiment, we find that affected firms – Delaware firms with CFOs not serving on the board – experience a significant increase in the level of tax avoidance in the post-ruling period, compared to other firms. Further, the effect is more pronounced for the affected firms that have weaker governance, a lower level of tax avoidance prior to the ruling, and more powerful CFOs. We find that the affected firms also experience a decrease in tax risk after the ruling compared to other firms. Overall, our study is the first to document systemic evidence that fiduciary duties encourage CFOs to avoid more taxes.