Overconfident CEOs and Corporate Tax Avoidance
Keywords:
CEO attributes, Tax aggressiveness, Optimism, Upper echelon, NarcissismAbstract
The upper echelon theory predicts that the personalities, attributes, and skills of the managerial cadre should have an influencing role in the culture, practices, and outcomes within an organisation. In light of this prediction, this paper examines how overconfident CEO may affect tax avoidance practices. Tax avoidance was captured using the measure developed by Henry and Sansing while CEO overconfidence was captured using firm-level investment. Based on the analyses of 660 firm-year observations of non-financial firm, the study found that overconfident CEOs are associated with corporate tax avoidance. This finding is consistent with the upper echelon theory and helps tax authorities and officers understand the roles that an overconfident CEO may play towards tax avoidance. It is recommended that tax regulators can employ the technique of CEO profiling as a preliminary selection tool that can be used pick companies for tax audit and investigations.
References
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Chen, S., Chen, X., Cheng, Q., and Shevlin, T., 2010. Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95, pp. 41–61.
Chyz, J. A., 2013. Personally tax aggressive executives and corporate tax sheltering. Journal of Accounting and Economics, 56, pp. 311-328.
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Gebhart, M. S., 2017. Measuring corporate tax avoidance: An analysis of different measures. Junior Management Sciences, 3, pp. 43-60.
Graham, J. R., Hanlon, M., Shevlin, T., and Shroff, N., 2014. Incentives for tax planning and avoidance: Evidence from the field. The Accounting Review, 89(3), pp. 991-1023.
Hall, B. J., and Murphy, K. J., 2002. Stock options for undiversified executives. Journal of Accounting and Economics, 33(2), pp. 3–42.
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Larwood, L., and Whittaker, W., 1977. Managerial myopia: Self-serving biases in organizational planning. Journal of Applied Psychology, 62(2), pp. 194–198.
Lee, B. B., Dobiyanski, A., and Minton, S., 2015. Theories and empirical proxies for corporate tax avoidance. Journal of Applied Business and Economics, 17(3), pp. 21–34.
Lou, Y., and Wang, M., 2009. Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business and Economics Research, 7(2), pp. 61-78
Malmendier, U., and Tate, G., 2015. Behavioral CEOs: The role of managerial overconfidence. Journal of Economic Perspectives, 29(4), pp. 37–60
Malmendier, U., and Tate, G., 2008. Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), pp. 20–43
Malmendier, U., and Tate, G., 2005. CEO overconfidence and corporate investment. Journal of Finance, 60(6), pp. 2661–2700.
Okafor, R. G., 2012. Tax revenue generation and Nigerian economic‖ development. European Journal of Business and Management, 4(19), pp. 49-56.
Okoye, P. V. C., Akenbor, C. O., and Obara, L. C., 2012. Promoting sustainable tax compliance in the informal sector in Nigeria. An International Journal of Arts and Humanities, 1(1), pp. 40-54.
Olsen, K. J., and Stekelberg, J., 2016. CEO narcissism and corporate tax sheltering. Journal of the American Taxation Association, 38, pp. 1-22.
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Richardson, G., Taylor, G., and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. J. Account. Public Policy, 32, pp. 68–88
Richardson, S. A., 2006. Over-investment of free cash flow. Review of Accounting Studies 11(2-3), pp. 159-189.
Roll, R., 1986. The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), pp. 197–216.
Salihu, I. B., Annuar, H. A., and Obid, S. N. S. 2015. Foreign investors’ interests and corporate tax avoidance: Evidence from an emerging economy. Journal of Contemporary Accounting and Economics, 11, pp. 138-147.
Salihu, I. B., Obid, S. N. S., and Annuar, H. A., 2014. Government ownership and corporate tax avoidance: Empirical evidence from Malaysia. Book proceedings of ICETSR, Malaysia. Available at www.pakinsight.com/ebooks/ICETSR [Accessed 3rd September, 2019]
Sanni, A. U., 2007. Tax reform in the capital market: A welcome development. Seminar Paper presented at the Ogun State Internal Revenue Service Seminar in Abeokuta on August 2nd, 2007
Schrand, C. M., and Zechman, S. L. C., 2012. Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53(1–2), pp. 311–329.
Shackelford, D., and Shevlin, T., 2001. Empirical tax research in accounting. Journal of Accounting and Economics, 31(1), pp. 321–387.
Slemrod, J., 2004. The economics of corporate tax selfishness. National Tax Journal, 57, pp. 877–899.
Slemrod, J., and Yitzhaki, S., 2002. Tax avoidance, evasion and administration. Handbook on Public Economics, 3, pp.1425-1470
Torgler, B., and Schaltegger, C. A., 2007. Government accountability and fiscal discipline: A panel analysis with Swiss data. Journal of Public Economics, 91(1), pp. 117-140.
Worlu, C. N., and Nkoro, E., 2012. Tax revenue and economic development in Nigeria: A macroeconomic approach. Academic Journal of Interdisciplinary Studies, 1(2), pp. 211-223
Zhu, D. H., and Chen, G., 2015. CEO narcissism and the impact of prior board experience on corporate strategy. Administrative Science Quarterly, 60(1), pp. 31-65.
Aliani, K., Mhamid, I., and Rossi, M., 2016. Does CEO overconfidence influence tax planning? Evidence from Tunisian context. Int. J. Managerial and Financial Accounting, 8(3/4), pp. 197-208
Allingham, M., and Sandmo, A., 1972. Income tax evasion: A theoretic analysis. Journal of Public Economics, 1, pp. 323–338.
Andreoni, J., Erard, B., and Feinstein, J., 1998. Tax compliance. Journal of Economic Literature, 36(1), pp. 818-860.
Aronmwan, E. J., and Okafor, C. A., 2019. Corporate tax avoidance: Review of measures and prospects. International Journal of Accounting and Finance, 8(2), pp. 21-42.
Ben-David, I., Graham, J. R., and Harvey, C. R., 2013. Managerial miscalibration. Quarterly Journal of Economics, 128(4), pp. 1547–1584.
Boussaidi, A., and Hamed, M. S., 2015. The impact of governance mechanism on tax aggressiveness: Empirical evidence from Tunisian context. Journal of Asian Business Strategy, 5(1), pp. 1-12
Campbell, T. C., Gallmeyer, M., Johnson, S. A., Rutherford, J., and Stanley, B. W., 2011. CEO optimism and forced turnover. Journal of Financial Economics, 101(3), pp. 695–712.
Chartered Institute of Taxation of Nigeria., 2017. Draft statement of taxation standard 9 on tax planning.
Chen, S., Chen, X., Cheng, Q., and Shevlin, T., 2010. Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95, pp. 41–61.
Chyz, J. A., 2013. Personally tax aggressive executives and corporate tax sheltering. Journal of Accounting and Economics, 56, pp. 311-328.
Chyz, J. A, Gaertner, F. B., Kausar, A., and Watson, L., 2019. Overconfidence and corporate tax policy. Review of Accounting Studies. Advance online publication. doi.org/10.1007/s11142-019-09494-z [Accessed 3rd September, 2019]
Dyreng, S., Hanlon, M., and Maydew, E., 2010. The effects of executives on corporate tax avoidance. The Accounting Review, 85(4), pp. 1163–1189.
Gebhart, M. S., 2017. Measuring corporate tax avoidance: An analysis of different measures. Junior Management Sciences, 3, pp. 43-60.
Graham, J. R., Hanlon, M., Shevlin, T., and Shroff, N., 2014. Incentives for tax planning and avoidance: Evidence from the field. The Accounting Review, 89(3), pp. 991-1023.
Hall, B. J., and Murphy, K. J., 2002. Stock options for undiversified executives. Journal of Accounting and Economics, 33(2), pp. 3–42.
Ham, C., Lang, M., Seybeth. N., and Wang, S., 2015. CFO narcissism and financial reporting quality [online]. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581157 [Accessed 3rd September, 2019]
Hambrick, D. C., 2007. Upper echelons theory: An update. The Academy of Management Review, 32(2), pp. 334-343
Hambrick, D. C., and Mason, P. A., 1984. Upper echelons: The organization as a reflection of its top managers. The Academy of Management Review, 9(2), pp. 193-206
Hanlon, M., and Heitzman, S., 2010. A review of tax research. Journal of Accounting and Economics, 50, pp. 127-178
Hirshleifer, D., Low, A., and Teoh, S. H., 2012. Are overconfident CEOs better innovators?” Journal of Finance, 67(4), pp. 1457–1498.
Ho, C. R., and Chang, Y., 2009. CEO Overconfidence and corporate financial distress [online]. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1659440 [Accessed 3rd September, 2019]
Hribar, P., and Yang, H., 2016. CEO overconfidence and management forecasting. Contemporary Accounting Research, 33(1), pp. 204-227.
Hsieh, T., Wang, Z., and Demirkan, S., 2018. Overconfidence and tax Avoidance: The role of CEO and CFO interaction. Journal of Accounting and Public Policy, 37, pp. 241–253.
Larwood, L., and Whittaker, W., 1977. Managerial myopia: Self-serving biases in organizational planning. Journal of Applied Psychology, 62(2), pp. 194–198.
Lee, B. B., Dobiyanski, A., and Minton, S., 2015. Theories and empirical proxies for corporate tax avoidance. Journal of Applied Business and Economics, 17(3), pp. 21–34.
Lou, Y., and Wang, M., 2009. Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business and Economics Research, 7(2), pp. 61-78
Malmendier, U., and Tate, G., 2015. Behavioral CEOs: The role of managerial overconfidence. Journal of Economic Perspectives, 29(4), pp. 37–60
Malmendier, U., and Tate, G., 2008. Who makes acquisitions? CEO overconfidence and the market’s reaction. Journal of Financial Economics, 89(1), pp. 20–43
Malmendier, U., and Tate, G., 2005. CEO overconfidence and corporate investment. Journal of Finance, 60(6), pp. 2661–2700.
Okafor, R. G., 2012. Tax revenue generation and Nigerian economic‖ development. European Journal of Business and Management, 4(19), pp. 49-56.
Okoye, P. V. C., Akenbor, C. O., and Obara, L. C., 2012. Promoting sustainable tax compliance in the informal sector in Nigeria. An International Journal of Arts and Humanities, 1(1), pp. 40-54.
Olsen, K. J., and Stekelberg, J., 2016. CEO narcissism and corporate tax sheltering. Journal of the American Taxation Association, 38, pp. 1-22.
Radhakrishna, R. B., 2007. Tips for developing and testing questionnaires/instruments. Journal of Extension [online]. Available at https://www.joe.org/joe/2007february/tt2.php [Accessed 3rd September, 2019]
Richardson, G., Taylor, G., and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. J. Account. Public Policy, 32, pp. 68–88
Richardson, S. A., 2006. Over-investment of free cash flow. Review of Accounting Studies 11(2-3), pp. 159-189.
Roll, R., 1986. The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), pp. 197–216.
Salihu, I. B., Annuar, H. A., and Obid, S. N. S. 2015. Foreign investors’ interests and corporate tax avoidance: Evidence from an emerging economy. Journal of Contemporary Accounting and Economics, 11, pp. 138-147.
Salihu, I. B., Obid, S. N. S., and Annuar, H. A., 2014. Government ownership and corporate tax avoidance: Empirical evidence from Malaysia. Book proceedings of ICETSR, Malaysia. Available at www.pakinsight.com/ebooks/ICETSR [Accessed 3rd September, 2019]
Sanni, A. U., 2007. Tax reform in the capital market: A welcome development. Seminar Paper presented at the Ogun State Internal Revenue Service Seminar in Abeokuta on August 2nd, 2007
Schrand, C. M., and Zechman, S. L. C., 2012. Executive overconfidence and the slippery slope to financial misreporting. Journal of Accounting and Economics, 53(1–2), pp. 311–329.
Shackelford, D., and Shevlin, T., 2001. Empirical tax research in accounting. Journal of Accounting and Economics, 31(1), pp. 321–387.
Slemrod, J., 2004. The economics of corporate tax selfishness. National Tax Journal, 57, pp. 877–899.
Slemrod, J., and Yitzhaki, S., 2002. Tax avoidance, evasion and administration. Handbook on Public Economics, 3, pp.1425-1470
Torgler, B., and Schaltegger, C. A., 2007. Government accountability and fiscal discipline: A panel analysis with Swiss data. Journal of Public Economics, 91(1), pp. 117-140.
Worlu, C. N., and Nkoro, E., 2012. Tax revenue and economic development in Nigeria: A macroeconomic approach. Academic Journal of Interdisciplinary Studies, 1(2), pp. 211-223
Zhu, D. H., and Chen, G., 2015. CEO narcissism and the impact of prior board experience on corporate strategy. Administrative Science Quarterly, 60(1), pp. 31-65.
Published
2021-06-24
How to Cite
Ilaboya, O. J. ., & Aronmwan, E. (2021). Overconfident CEOs and Corporate Tax Avoidance: Array. The Journal of Accounting and Management, 11(2). Retrieved from https://dj.univ-danubius.ro/index.php/JAM/article/view/1000
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