The Effect of Changes in Corporate Taxes and Corporate Governance on Equity Prices.

Prior research has established the relationship between corporate governance and firm performance. This paper investigates that relationship in the context of a change in cash flows and earnings generated by an exogenous shock-an unexpected change in corporate tax policy. The impact of an unexpected change in taxes should be more evident for those companies with better prospects for future profitability. Furthermore, the study argues that the effects of a change in tax policy should have a greater impact on firms with superior corporate governance structures, as better governed companies will more effectively direct the impact on cash flows to shareholders. Results of the study suggest that an interaction between corporate governance and future profitability exists and is most pronounced in smaller sized companies. [ABSTRACT FROM AUTHOR]