Top management conservatism and corporate risk strategies: Evidence from managers' personal political orientation and corporate tax avoidance

TLDR

The study investigates whether managers’ personal political orientation explains firm tax avoidance and frames tax avoidance as a measure of corporate risk using political orientation as a proxy for managerial conservatism. The authors examine changes in tax avoidance around CEO turnovers and use political orientation as a proxy for managerial conservatism. Results show that firms led by Republican‑leaning executives engage in less tax avoidance, that tax‑avoidance patterns around CEO turnovers corroborate this, and that political orientation helps explain top‑management composition and CEO succession. © 2014 John Wiley & Sons, Ltd.

Abstract

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 Republican Party actually engage in less tax avoidance than firms whose executives lean toward the Democratic Party. 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.