Your heart is where your treasure is: Family chairman and tax avoidance in family-controlled firms

Abstract

This study examines the effects of family chairman on corporate tax avoidance in family-controlled firms. By employing the socioemotional wealth (SEW) theory, we find that family chairmen engage in less tax avoidance than non-family counterparts, because the decisions of family leaders are more affected by the incentive to preserve SEW, which is built on family members’ identification with the family business and their concerns about the family reputation. Such an effect is more pronounced in firms with higher reputational risks. Furthermore, we discover that the chairman plays a dominant role in explaining tax avoidance decisions compared to the CEO and CFO. Our findings are further supported by the change in tax avoidance associated with chairman turnover. We also exclude plausible alternative explanations based on the agency theory, and our results are robust to a battery of sensitivity tests.