Using a large sample of hand-collected directors’ foreign experience data for Chinese listed companies from 2001 to 2016, we examine the impact of directors with foreign experience on corporate tax avoidance. We find a significantly negative association between directors with foreign experience and tax avoidance, suggesting that these directors can help constrain their firms’ tax aggressiveness. The result is robust to Heckman two-stage analysis, instrumental variable approach, inclusion of potential omitted variables, change analysis, and alternative tax avoidance measures. Further analyses reveal that reputation concerns and CSR awareness are potential channels through which returnee directors affect corporate tax avoidance. The negative relation between directors with foreign experience and tax avoidance only holds when directors’ foreign experiences are derived from countries or regions with higher investor protections. Nonindependent directors with foreign experience have larger impacts on corporate tax avoidance than independent directors, and the effect is more pronounced when directors with foreign experience sit on audit committees. Directors’ working and studying experiences both have important impacts on corporate tax avoidance. The result also suggests that the negative relation between directors with foreign experience and tax avoidance is more pronounced in non-stateowned firms. Overall, the findings suggest that directors’ foreign experience matters for corporate tax behavior in emerging markets.

Introduction

The board of directors takes responsibility for monitoring and advising management (Fama and Jensen, 1983). Prior research shows that director heterogeneity significantly affects the effectiveness of directors fulfilling their duties (e.g., Ferreira, 2009; Cho et al., 2017; Gul et al., 2011; Güner et al., 2008; Minton et al., 2014). As firms in emerging markets are generally considered to have weak corporate governance and poor management practices, the extent to which board composition can improve corporate governance and management practices is more important to shareholders and regulators (Syverson, 2011) than in developed countries. Recent studies provide evidence that directors with foreign experience help facilitate companies’ access to foreign resources and internationalization (Oxelheim et al., 2013), improve firm performance in emerging markets (Giannetti et al., 2015), and transfer governance practices across countries (Iliev and Roth, 2018). Extending this line of research, we explore whether and how directors with foreign experience affect firms’ tax avoidance. The question is essential, as tax is one of the most important corporate decisions in which directors are also involved (Erle, 2008). In his 2009 remarks, the IRS Commissioner, Douglas Shulman, urged corporate boards to play more important roles in conducting assessment and oversight of tax risk.1 In a 2017 KPMG survey of tax directors of multinational companies, over 60% of respondents confirmed that a board member (or board-level individual) takes responsibility for tax.2 Directors with foreign experience, or returnee directors, may affect their firms’ tax avoidance decisions in two opposite directions. On the one hand, returnee directors may put shareholder value maximization as their primary duty and ask management teams to reduce tax payment. A few studies provide evidence that managers and directors are punished for tax overpayment and rewarded for tax avoidance (Chyz and Gaertner, 2018; Lanis et al., 2017). This may be especially relevant, as managers in some state-owned companies sometimes opt to pay more taxes for their own promotion (Bradshaw et al., 2019). On the other hand, returnee directors may have greater reputation concerns about firms’ tax avoidance and, therefore, monitor management to reduce tax avoidance.