The Effects of Executives on Corporate Tax Avoidance

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, March 19, 2010.

In the paper, The Effects of Executives on Corporate Tax Avoidance, which is forthcoming in the Accounting Review, we investigate whether individual executives have an effect on their firm’s tax avoidance that cannot be explained by characteristics of the firm. Despite decades of empirical research in corporate taxation, little attention has been focused on whether individual executives have an effect on their firm’s tax avoidance. Until recently, most empirical tax research focused on the role of firm characteristics in tax avoidance. In this prior literature, executives were either ignored or treated as homogenous inputs to the tax avoidance process. In contrast, our paper considers the possibility that individual top executives are partially responsible for variation in tax avoidance across firms, not necessarily through direct involvement in the tax function, but by setting the “tone at the top.” 

We track the movement of 908 CEOs, CFOs and other executives across firms during the period 1992 to 2006. Examining executives who switch firms is important to control for firm fixed-effects and identify executive-specific effects. The results indicate that individual executives play a significant role in determining the level of tax avoidance that firms undertake incremental to characteristics of the firm. Analyzing the executive effects in event time shows results consistent with executive-specific tax avoidance that arises shortly after the executive arrives and mean reverts after the executive leaves. In addition, an executive’s effect on tax avoidance at his first firm tends to be positively associated with his effect at the second firm, mitigating potential concerns that our results are driven by random effective tax rate changes at only one firm during the executive’s tenure…(continue reading)


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