The Role of Managerial Ability in Corporate Tax Avoidance

Abstract

Most prior studies model tax avoidance as a function of firm-level characteristics and do not consider how individual executive characteristics affect tax avoidance. This paper investigates whether executives with superior ability to efficiently manage corporate resources engage in greater tax avoidance. Our results show that moving from the lower to upper quartile of managerial ability is associated with a 3.15% (2.50%) reduction in a firm’s one-year (five-year) cash effective tax rate. We examine how higher-ability managers reduce income tax payments and find that they engage in greater state tax planning activities, shift more income to foreign tax havens, make more research and development credit claims, and make greater investments in assets that generate accelerated depreciation deductions. Identifying a manager characteristic related to firms’ tax policy decisions adds to our understanding of the factors that explain the substantial variation in corporate income tax payments across firms. This paper was accepted by Mary Barth, accounting.

Managerial Ability and Credit Ratings

“…Since then, researchers have focused primarily on observable CEO characteristics including early life experiences, education, military service, personal investment style, and physical traits such as gender and height. 6 Existing literature examining the impact of managers on investment policy (e.g., Bertrand and Schoar 2003;Benmelech and Frydman 2015), financial policy (Pan, Wang, and Weisbach 2014), firm performance (Adams et al 2005;Andreou, Ehrlich, Karasamani, and Louca 2015), initial public offerings (Chemmanur and Paeglis 2005), compensation (Graham, Li, and Qiu 2012;Cust odio and Metzger 2013), accounting choices (Bamber, Jiang, and Wang 2010;Ge, Matsumoto, and Zhang 2011;Demerjian et al 2013;Demerjian, Lewis, and McVay 2016), corporate tax policy (Dyreng, Hanlon, and Maydew 2010;Koester, Shevlin, and Wangerin 2016) and auditor decisions (Krishnan and Wang 2015).…”

Management Compensation, Gender Diversification, and Executive Preferences on Tax Avoidance of IDX Manufacturing Companies

“…Based on the proposition of Robinson and Dechant (1997), it can be concluded that the diversity of the board has better managerial skills in managing the company compared to the characteristics of homogeneous directors. When linked to tax avoidance, Koester's et al, (2016) research has proven that executives who have superior abilities in utilizing company resources efficiently use more tax avoidance measures. This study analyzes how managers who have higher ability reduce tax payments and find they are involved in tax planning activities.…”

Managerial ability and bond rating changes

“…Baik, Farber, and Lee () document a positive relation between managerial ability and corporate social responsibility (CSR) performance, suggesting that more‐able managers can also better manage their firms’ CSR performance. Koester, Shevlin, and Wangerin () find that more‐able managers are less likely to engage in corporate tax avoidance activities.…”