The Effects of Executives on Corporate Tax Avoidance

TLDR

The study examines whether individual top executives influence their firms’ tax avoidance beyond firm characteristics. The authors build a longitudinal dataset tracking 908 executives’ movements across firms to measure their impact on effective tax rates. Executive turnover explains a sizable portion of tax avoidance, with shifts between top and bottom quartiles producing an ~11% swing in GAAP effective tax rates.

Abstract

This paper investigates whether individual top executives have incremental effects on their firms’ tax avoidance that cannot be explained by characteristics of the firm. To identify executive effects on firms’ effective tax rates, we construct a dataset that tracks the movement of 908 executives across firms over time. The results indicate that individual executives play a significant role in determining the level of tax avoidance that firms undertake. The economic magnitude of the executive effects on tax avoidance is large. Moving between the top and bottom quartiles of executives results in approximately an eleven percent swing in GAAP effective tax rates; thus, executive effects appear to be an important determinant in firms’ tax avoidance.