Do common institutional owners' activisms deter tax avoidance? Evidence from an emerging economy

Abstract

We examine the association between common institutional ownership and tax avoidance in an institutional setting characterized by concentrated ownership and principal-principal agency conflict. We find a negative association between tax avoidance and common institutional ownership, and this relationship is stronger among firms with more analyst coverage and higher concentrated ownership. Overall, our results support the monitoring efficiency of institutions and their role in internalizing the negative externality of a firm's tax avoidance on common-industry peers. Further, the reduction in tax avoidance in firms with common institutional ownership is associated with a higher firm value. By demonstrating the role of common institutional owners in deterring tax aggressiveness, our study sheds light on the principal-principal agency cost of tax avoidance in emerging economies.