Content area
Full text
1. Introduction
Literature on corporate tax avoidance has been rapidly growing in recent years (Hanlon and Heitzman, 2010 for a review). However, studies exploring the relationship between ownership/organizational structure and tax avoidance remain limited. Shackelford and Shevlin (2001) indicate that the effect of organizational ownership on tax avoidance remains important, but understudied. We attempt to fill this gap by exploring the impact of pyramid ownership on corporate tax avoidance.
Many large firms in Canada belong to business groups, which are typically organized as pyramids (Attig et al., 2004; Morck et al., 2005, and King and Santor, 2008). That is, an apex firm (we use apex firm, ultimate owner and controlling shareholder interchangeably) holds controlling shares in the top tier of firms. Each of these firms then holds controlling shares in the second tier, and so on. La Porta et al. (1999) find that the ultimate owners generally control a group of firms through a pyramidal structure in most countries outside the USA and the UK For example, over two-third of the firms in Indonesia are affiliated with pyramids as well as approximately 50 per cent of firms in Singapore and Taiwan and around 40 per cent in Japan (Claessens et al., 2002a, Attig et al., 2004).
Pyramidal structure is also prevalent in Canada. Morck et al. (2000) report that around 50 per cent of listed firms belong to a pyramidal group in the 1980s. Attig et al. (2004) document that pyramidal structure is used to gain control by ultimate owners in 35 per cent of the firms in 1996.
Strong legal protection of investors, fairness to minority shareholders and special political processes all contribute to the widely held ownership in the USA and UK (Shleifer and Vishny, 1997; La Porta et al., 1999; Morck, 2005). While Canada’s general legal and institutional structures are similar to those of the USA, its specific institutional and regulatory environment is not. For example, American dividends paid to corporate shareholders are taxable[1]. However, in Canada, inter-corporate dividends are tax exempted, which may explain the prevalence of inter-corporate ownership among Canadian firms (Morck, 2003).
Additionally, several studies have also shown how cultural values and political processes in Canada play a role in shaping concentrated pyramid ownership...