CEO Endowed Trait and Corporate Tax Avoidance: Evidence from Pilot CEOs

Abstract

This paper investigates whether executives with thrill-seeking tendencies engage in greater tax avoidance. Our results show a strong negative association between CEO thrill-seeking and a firm’s cash effective tax rate. We further find that thrill-seeking has a considerably stronger effect on tax avoidance compared with other commonly studied executive characteristics, including overconfidence and ability. Cross-sectional tests reveal that the baseline results are not sensitive to managerial remuneration incentives, suggesting that intrinsic incentives derived from endowed traits are not easily moderated by extrinsic motivation from compensation contracts. Furthermore, we find that the baseline effect only holds in settings with strong institutional oversight, suggesting that institutional monitoring helps channel managerial thrill-seeking tendencies towards value creating tax planning endeavors. Additional analysis reveals that thrill-seeking CEOs reduce effective tax rates only when they are subject to institutional oversight and when they have the ability to engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which thrill-seeking tendencies influence corporate tax planning activities.