Overconfident CEOs, decentralisation, and tax aggressiveness: evidence from Japan

Abstract

This study investigates the relationship between chief executive officers' (CEO) overconfidence and tax avoidance, and the process through which the influence of CEOs' overconfidence propagates to subsidiaries and affiliates. To estimate CEOs' overconfidence, this study focuses on Japanese management forecasts, which are disclosed by most companies in Japan. This approach allows mitigating sample selection bias. The study's results indicate that: 1) companies with overconfident CEOs engage in more aggressive tax avoidance; 2) the influence of CEOs' overconfidence is more pronounced in parent companies directly operated by CEOs. These trends are more pronounced when CEOs are overconfident regarding specific information and are also observed when the analysis accounts for factors related to corporate governance. The study's findings suggest that the nature of manager has a substantial impact on corporate tax planning, and such impact is more likely to spread in organisations closer to the CEO.