Tax avoidance and CEO turnover: evidence from China

<abstract> <p>As market competition has increased in recent years, CEO turnover has become more frequent. The tax avoidance activities maximize after-tax profits. After the CEO turnover, the company's strategy needs to be repositioned. Therefore, this paper analyzes the impact of corporate tax avoidance on CEO turnover. This paper selects the Chinese A-share market from 2010 to 2019. It combines theoretical analysis and empirical research to explore the impact of corporate tax avoidance on CEO turnover and further analyzes the relationship under different ownerships. This paper finds a negative relationship between tax rates and forced CEO turnover. Listed companies with lower tax rates increase social concern, leading to public doubts and inspections by tax authorities, which further damage the company's reputation. CEO turnover is the quick and easy way to respond to public accusations. This paper also finds that state-owned enterprises (SOEs) undertake more social responsibilities than non-state-owned enterprises (non-SOEs). The main contributions of this paper are as follows: From the theoretical perspective, this paper conducts systematic research on corporate tax avoidance and CEO turnover and analyzes the relationship under different ownerships. In practice, this paper puts forward relevant policy recommendations for the long-term development of enterprises and social responsibilities.</p> </abstract>

This study investigates whether managers’ personal political orientation helps explain tax avoidance at the firms they manage. Results reveal the intriguing finding that, on average, firms with top executives who lean toward the Republican Party actually engage in less tax avoidance than firms whose executives lean toward the Democratic Party. These findings are consistent with the argument that Republican managers’ preference for lower taxes is dominated by their desire to be conservative. Thus, the conservative tone at the top they set leads the firm to engage in less tax avoidance than firms that are run by Democrat managers. Additionally, we find that this effect appears to be driven by the subset of managers who are entrenched, which is consistent with managers having more freedom to imprint their personal preferences on firms with weaker governance. We also examine changes in tax avoidance around CEO turnovers and find corroborating evidence.

We investigate whether managers' personal political orientation helps explain tax avoidance at the firms they manage. Results reveal the intriguing finding that, on average, firms with top executives who lean toward the R epublican P arty actually engage in less tax avoidance than firms whose executives lean toward the D emocratic P arty. We also examine changes in tax avoidance around CEO turnovers and find corroborating evidence. Additionally, we find that political orientation is helpful in explaining top management team composition and CEO succession. Our paper extends theory and research by (1) illustrating how tax avoidance can serve as another measure of corporate risk taking and (2) using political orientation as a proxy for managerial conservatism, which is an ex ante measure of a manager's propensity toward risk . Copyright © 2014 John Wiley & Sons, Ltd.

This study aims to examine the influence of CEO turnover, tax avoidance and executive compensation on earnings management by using discretionary accruals as a proxy of earnings management. The samples of this research were the manufacturing firms listed in BEI (Indonesia Stock Exchange) between 2011 and 2015. The samples were selected by using purposive sampling on 24 companies with 120 observations. The Data were collected from annual report and data analyzed by multiple regression analysis. The results of this study shows that CEO turnover has influence on earnings management, tax avoidance has influence on earnings management, and executive compensation has no influence on earnings management.

Existing research suggests that generalist CEOs, who possess managerial skills that are transferrable across firms and industries, are more able to bear downside risk than specialist CEOs with non-transferrable managerial expertise. In this paper, we examine whether generalist CEOs are better positioned to engage in risky tax avoidance strategies than specialist CEOs. Our empirical results support this prediction and show that firms with generalist CEOs tend to engage in more tax avoidance than those with specialist CEOs. Our identification strategy includes an instrumental variable method and a difference-in-differences test using CEO turnover as a quasi-natural experiment to correct for endogeneities. A battery of robustness checks and cross-sectional tests strengthens our findings. Taken together, our findings imply that general managerial skills of CEOs matter more for tax planning than do specific managerial skills.

We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax avoidance activities after being accused of tax shelter activity. Finally, in tests of the capital market reaction to news of tax shelter involvement, we find that negative event-period returns fully reverse within a few weeks of the public scrutiny, consistent with a temporary market penalty to tax shelter news. In all, we conclude that there is little evidence of tax shelter usage leading to reputational costs at the firm level.

Tax Avoidance and CEO Turnover: Evidence from China

본 연구는 기업의 CSR성과가 조세회피성향에 미치는 영향을 알아보고자 하며, 이러한 관련성이 최고경영자의 교체에 따라 차별적 영향력이 있는지를 알아보고자 한다. CSR 관련 연구는 지금까지 많은 주제와 연관되어 이루어졌으나, 어느 분야에서도 일관된 연구결과는 보고되지 못하고 있다. 따라서, 본 연구는 기존의 연구방법과는 달리 다른 영향요인을 추가하는 메커니즘으로 접근하고자 한다. 즉, 선행연구를 다음과 같은 방법으로 확장하였다. 첫째, 선행연구들은 CSR활동과 조세회피의 관련성 또는 CSR활동과 최고경영자의 교체 등의 개별적 주제로 다루어왔으나, 본 연구는 이러한 주제를 관련지어 CSR성과와 조세회피관련성에 CEO교체가 추가적인 역할을 하는지를 알아보고자 한다. 연구 결과를 요약하면, 첫째, CSR활동에 적극적인 기업은 최고경영자교체에 양(＋)의 영향을 미치는 것으로 나타나, 최고경영자의 교체확률이 더 높음을 확인할 수 있었고, 둘째, CSR성과와 조세회피는 음(-)의 관계가 나타나 적극적으로 CSR활동을 이행하는 기업은 공격적 조세회피성향이 감소함을 확인하였다. 셋째, CSR활동기업의 조세회피성향에 최고경영자의 교체가 영향을 미치는지를 알아본 결과, 적극적인 CSR활동기업은 최고경영자의 교체 후, 조세회피성향은 완화됨을 확인할 수 있었다. 본 연구는 기업의 적극적인 CSR이행 효과가 기업의 주요 관심사인 현 상황에서, 기업의 주요 의사결정인 경영자교체와 관련지어 조세회피성향에 미치는 영향을 분석하였음에 의미를 찾을 수 있다.

This paper investigates whether executives will bear reputational costs as a result of using tax shelters within different ownership structures. Based on tax-violation events of Chinese listed firms, we find that CEOs in state-owned enterprises are more likely to bear reputational costs than CEOs in non-state-owned enterprises and that the penalty on executives always occurs in the current year rather than in the subsequent year. In addition, the individual reputational cost of tax avoidance is related to tax aggressiveness and regulatory punishment. The more severe the tax aggressiveness or the regulatory punishment is, the greater the reputational cost of tax avoidance is for CEOs in SOEs. Our findings not only provide direct empirical evidence for the research on the corporate reputational costs of tax avoidance in an agency framework, but they also have great significance for understanding “the Under-Sheltering Puzzle.”

Our study examines the effect of corporate tax outcomes on forced CEO turnover. While prior research argues that firms often do not engage in tax avoidance due to reputational concerns, the empirical evidence suggesting the existence of reputational costs is scarce. In a broad sample of firms, we find evidence of a relation between the payment of low taxes and forced turnover. We also find that forced CEO turnover is more likely when the firm pays a high tax rate relative to its peers. Our results are consistent with the existence of previously unexplored individual reputational costs for not engaging in tax avoidance. JEL Classifications: M40; H25.

ABSTRACTCompanies voluntarily adopt lead independent directors (LIDs) for the benefits they could bring to the board, such as further improving board independence, mitigating unresolved agency issues, enhancing board monitoring, and countering criticisms of corporate governance. We find that companies with LIDs have more conservative tax policies. The influence of LIDs on corporate tax policies is greater when the level of tax avoidance is more aggressive compared to their size and industry peers. We also find that investors favorably value the more conservative tax policies of companies with LIDs. Companies with LIDs have lower tax risk, pursue more conservative tax planning, such as lower UTB settlements, and are less likely to use tax shelters. These companies do not have aggressive valuation allowance releases and have fewer permanent book‐tax differences. Lastly, we also find an associated non‐tax benefit: CEOs in companies with LIDs do not have a higher likelihood of subsequent forced turnover for not engaging in tax avoidance. Thus, he investors’ higher valuation of more conservative corporate tax policies reduces the likelihood of subsequent forced CEO turnover.

Our study examines the effect of corporate tax outcomes on forced CEO turnover. While prior research argues that firms often do not engage in tax avoidance due to reputational concerns, the empirical evidence suggesting the existence of reputational costs is scarce. In a broad sample of firms, we find evidence of a relation between the payment of low taxes and forced turnover. We also find that forced CEO turnover is more likely when the firm pays a high tax rate. Our results are consistent with the existence of previously unexplored individual reputational costs for not engaging in tax avoidance.

Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14

Introduction Optimal penalties for corporate fraud require that firms face expected penalties equal to the total social costs of the crime. Yet formal courtimposed sanctions for committing fraud often represent a small fraction of the damage produced by the fraud. Sheer and Ho (1989), for example, estimate that the median and mean ratios of criminal fines to the private loss from private fraud were 0.14 and 0.73 in 1988. The corresponding median and mean ratios for government procurement fraud were 0.29 and 1.60. Including criminal restitution raises the median dollar sanction-to-loss ratio for private fraud to 0.84 and for government procurement fraud to 0.68. These ratios are for private parties convicted of fraud. The ratio of the expected court-imposed penalty to the social cost of the fraud is undoubtedly smaller. Particularly when compared to other crimes such as environmental pollution, where the median ratio of criminal fines to private loss is 3.71, the penalty for fraud seems surprisingly low. The perceived underpunishment of corporate frauds has recently affected public policy. Reflecting popular opinion that existing penalties were too low, the US Sentencing Commission – the federal agency responsible for setting the penalty guidelines used by judges – established corporate sentencing guidelines in 1991 that raised median corporate fraud penalties by over twentyfold. This article criticises the conventional wisdom about corporate fraud in two ways. First, we explain that the typical optimal criminal penalty for private corporate fraud is small because the external effects of such frauds are usually small. An increase in criminal penalties for corporate fraud can do more harm than good because it encourages the substitution of criminal penalties for reputation as a mechanism to police fraudulent behaviour.

PurposeThe aim of this paper is to examine how managerial ability affects corporate tax aggressiveness.Design/methodology/approachThe study follows the work of Demerjian, Lev, and McVay (2012) and quantifies managerial ability by calculating how efficiently managers generate revenues from given economic resources using the data envelopment analysis (DEA) approach. The study uses a wide range of measures of tax aggressiveness. Firm fixed-effects regressions and a difference-in-differences approach using information regarding CEO turnover to control for endogeneity are used.FindingsThe study finds a negative relationship between managerial ability and corporate tax aggressiveness. Further tests show that this negative relationship is more pronounced for firms with higher investment opportunities or firms with more reputational concerns.Originality/valueGiven the significant costs associated with tax aggressiveness and the negative effect it can have on managerial reputation if discovered, the results suggest that more able managers invest less effort in aggressive tax avoidance activities. This study furthers the understanding of how managerial personal traits affect corporate decision-making.