Does Decision Rights Delegation Impede or Enhance Tax Effectiveness?

Despite the importance of internal decision-making for corporate tax outcomes, we know little about the role of within-firm delegation of decision rights. Using confidential survey data, we examine the relation between corporate tax effectiveness and the extent to which capital investments, hiring, new product introduction, and sales and marketing decisions are delegated from central headquarters to local managers. Delegation of capital investment decisions is negatively related to tax effectiveness, suggesting that capital acquisition and location decisions are more likely to benefit from central headquarters’ coordination. In contrast, delegation of hiring decisions is positively associated with tax effectiveness, consistent with net benefits from leveraging superior local human capital information. Cross-sectional tests reveal that the benefits of delegation are lower (higher) when internal information quality is better (local knowledge is expected to be greater). Our findings provide initial evidence on how within-firm decision rights delegation is associated with firms’ tax effectiveness