Abstract
This paper investigates whether executives with risk-seeking tendencies engage in greater tax avoidance and find that CEOs who possess private pilot licenses (our proxy for risk-seeking) significantly reduce firm's cash effective tax rate. Risk-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. Additionally, we find that managerial oversight helps channel CEOs risk-seeking tendencies towards value creating tax planning endeavors. Further tests reveal that risk-seeking CEOs reduce effective tax rates only when they can engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which risk-seeking tendencies influence corporate tax planning activities.
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