The Corporate Governance of Profit Shifting

We examine tax-motivated profit shifting as the outcome of corporate governance characteristics in multinational enterprises (MNEs). We propose a novel subsidiary-year measure of profit shifting, estimated from the responses of subsidiary profits to exogenous parent earnings shocks. Subsequently, we hypothesize that audit committee size and experience, as well as CEO duality are key factors affecting profit shifting. Our baseline results show that increasing audit committee size by one standard deviation increases profit shifting by an economically significant 7.8%. We also find that this positive effect reverses for MNEs with higher numbers of audit committee members who have audit expertise and for MNEs without CEO duality.