Institutional Blockholder Political Orientation and Tax Avoidance

Abstract

Prior literature shows that institutional investors influence the tax policies of investee firms. Our study examines the effect of Republican-oriented institutional blockholders on tax avoidance, and finds that investee-firm tax avoidance increases as the ownership by Republican-oriented institutional blockholders increases. Next, we find that Republican-oriented institutional investors are most effective in influencing investee tax avoidance when (1) investee firms' CEOs have compatible political orientations, and (2) investee firms are located in compatible political climates. Our findings add to the literature on the active role of institutional investors in firm policies and provide evidence that institutional investors' political orientation can influence investee firms' tax avoidance.