Judge Ideology and Corporate Tax Planning

Travis Chow, Allen H. Huang, Kai Wai Hui, and Terry Shevlin

♦ We investigate whether judges’ political ideology affects corporate tax behaviors. We find firms engaging in less aggressive tax planning when Circuit Court judges are more liberal. Cross-sectionally, the deterrent effect of liberal judge ideology is more pronounced for firms that engage in judiciary-sensitive tax strategies, face higher enforcement risk from the Internal Revenue Service, or have larger reputational costs from tax disputes. Our findings further suggest that liberal judge ideology reduces firms’ R&D investments and market value by constraining tax planning. Overall, our evidence highlights the importance of judge ideology to firm behavior in the context of corporate tax planning.

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