The Effect of Politician Stock Ownership on Corporate Tax Strategy

Abstract

We examine the relation between politician stock ownership and corporate tax strategy. Specifically, we examine whether politicians’ direct stock ownership as a measure of politician-initiated corporate political connections (CPC) is associated with companies’ tax aggressiveness. Using hand-collected data on U.S. politicians’ stock ownership, we find that companies’ tax aggressiveness is not affected by the incidence of politician stock ownership. This contrasts with prior research on tax aggressiveness when political connections are directly initiated by the company. However, we find that the concentration of politician stockholders within a company is strongly associated with tax aggressiveness. This evidence suggests that companies engage in more aggressive tax strategies when they anticipate lower expected costs stemming from a critical mass of politician stock owners. We also find increased tax aggressiveness when politician stockholders have more legislative influence, stronger alignment of economic interests with the company, or when the company is headquartered in the politician’s home state. Moreover, politician-induced tax aggressiveness is incremental to the tax avoidance associated with company-initiated CPC gained through corporate campaign contributions. Taken together, our evidence suggests that concentrated politician stock ownership plays an important role in determining companies’ tax strategies and that this mechanism is incremental to other forms of corporate political connections.