Description
Please finish the two hypotheses and explain some variables (1)H1: CEO overconfidence has a negative effect on tax avoidance. (200) please use two reference(2)H2: Board independence has a moderating effect on CEO characteristics and tax avoidance relationships. (200) please use two reference (3)Indenpendent variable: CEO overconfidence (100) use at lease one reference(4)Moderating variable: Board independence (100) use at lease one reference (5)control variable (400~500) Each variable should have at least one reference *Intangible Assets Intangible assets (intan) in year t scaled by lagged asset (at).*Firm Size The natural logarithm of total assets (at) at the beginning of year t. *Tobin’s Q Total assets (at) plus market value of equity (prcc*csho) minus book value of equity (ceq) minus deferred taxes (txdb) scaled by lagged assets (at). *Cash Flow Income before extraordinary items (ib) plus depreciation and amortization (dp) scaled by lagged assets (at). *Return on Assets Pre-tax income (pi) in year t scaled by lagged asset (at). *cash holdings (che) in year t scaled by lagged asset (at).*No Dividend An indicator variable equal to one if a firm does not pay common dividends (dvc), and zero otherwise. *Leverage Long-term debt (dltt) in year t scaled by lagged asset (at). You do not need write the formula, but you should explain why chose these variables as the control variable.
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CEO characteristics and tax avoidance in US: The moderating role of corporate
governance and ownership structure
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Introduction
The concept of tax avoidance is significantly entrenched in the US corporate culture with
executives seeking to reduce the amount of corporate tax payable. Based on the significantly
high percentage of corporate revenue that is committed to government taxes in the US, tax
avoidance is considered a value enhancement decision. Tax avoidance is therefore the use of
legal strategies by corporates and individuals to lower their respective tax bills or avoid payment
of taxes. Even though tax avoidance is not illegal, it constitutes an ethical issue because of the
potential for illegal ways of tax evasion. Thomsen and Watrin (2018) identify the potential for of
tax avoidance turning into tax evasion through concealment of the true state of organizational
performance. The thin line between tax avoidance and tax evasion means that executives risk
tainting their reputations when they engage in illegal activities aimed at avoiding tax payments.
The traditional focus of taxation avoidance reproach was on its impacts on the investment
and financing decisions in organizations. However, recent research is increasingly inclining
towards a focus on the concepts of corporate tax planning and the involvement of executives in
such planning. As noted in Li, Ma, and Shevlin (2021), the recent decade has experienced an
evolution in the literature on agency consideration in tax avoidance. Legitimate tax avoidance by
organizations is often attributable to the characteristics of chief executives whose motivation
determines the potential for avoidance. Through tax avoidance, organizations transfer the
benefits of taxes from governments to private individuals through shares in companies.
Consequently, organizations derive high levels of tax efficiency in decisions when their
executives have appropriate compensation. In contrast, however, the potential for tax avoidance
is also associated with companies where the executives derive high powered incentives.
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The development of efficient mechanisms to support tax avoidance is associated with
self-motivated rent seeking executives. In essence, the motivation for tax avoidance is based on
the perceived and actual benefits for the organization and the executives. As noted in Dyreng,
Hanlon, and Maydew (2010), executives can create opportunities for diversion of resources
saved from tax avoidance to benefit them individually. Based on the aforementioned arguments,
this paper seeks to explore the relationship between chief executive officer characteristics and
tax avoidance within US organizations. In particular, the paper will consider the mediating roles
of corporate governance and ownership structure in determining the influence of executive s
characteristics on tax avoidance. The ownership structures and involvement of owners in
management through founder CEOs is also considered for its impact on the potential for tax
avoidance in organizations.
In considering the influence of CEO characteristics on tax avoidance, this paper will
explore their impacts on operational and financial strategies. Despite increasingly growing
coverage of role of executives, there is a significant gap in understanding their role in corporate
tax planning. Through an understanding of the influence of CEO characteristics on tax
avoidance, this study contributes to increased knowledge on the motivation for executives
engaging in tax avoidance. In turn, this study considers the large heterogeneity in management
practices that is understudied by standard theories and models. The ownership structure of US
organizations also influences motivation for CEOs to engage in tax avoidance based on the level
of power they wield in the organizations. The mediating role of ownership structure thus
facilitates tax avoidance by influencing the level of interest that CEOs derive from tax
avoidance.
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Background
The influence of CERO characteristics on tax avoidance in US firms is based on their
potential to determine value creation. Indeed, the CEO characteristics influences the tax
avoidance strategies through diversity in styles of management and personal skills. According to
Gallenmore, Maydew, and Thornock (2014), the executives of organizations have the
responsibility of determining corporate tax policies and effectively influencing tax decisions at
departmental levels. In providing the background for this study, the research focuses on three
aspects including the tax reforms, corporate governance reforms, and ownership structure
reforms in the US.
Tax Reforms in the US
The US tax system is characterized by numerous tax breaks that facilitate tax avoidance
as corporates exploit loopholes. However, the US has experienced significant reforms in its
administration of corporate taxes through changes in provisions for exemptions, deductions,
rates, and credits. The Tax Cuts and Jobs Act of 2017 is considered as the single most significant
source of reforms in recent US history. The legislation effectively reduced the rate of top
corporate income tax from 35% to 21% and effectively providing significant cuts in tax payable
for most organizations (Gale et al., 2019). Despite the reduction in the rate of corporate income
tax, the reforms also imposed significant changes on the instruments of administering corporate
income tax. One of the most prominent features of the tax reform is in the subsidization of some
economic activities at the expense of others. In particular, the organization of businesses affects
the rate of tax imposed on specific types of businesses. Inherently, the varied rates create
opportunities for tax avoidance in corporate organizations.
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The tax reforms instigated in 2017 have a significant influence on the amount of taxes
remitted to the federal government. The implication of the new legislation is based on its
determination of the tax treatment of top executive pay across public companies in the US. The
formulation of the tax reforms was aimed at reducing the excessive employee remuneration
problem. Traditionally, tax reforms allowed for increased shift from cash compensation of top
executives to performance based compensation including stock options. In turn, the amount of
tax payable to the federal government would be significantly reduced as corporates preferred this
shift in reducing their respective tax bills (Clausing, 2020). Through the new tax laws, the
deductions made by public companies for compensation of their top executives have been
limited a $1 million every year. The implication of this change is that compensations of more
than $1 million are no longer deducible from tax exemptions.
Still, the tax reforms also affected credits, expensing, depreciator, and deductions related
to different businesses. The tax reforms have also disallowed business interest deductions that
were previously fully deductible. In particular, the legislation disallows business interest
deductions for net interest that is in excess of 30% of business income. Similarly, the tax reforms
instituted through the Tax Cuts and Jobs Act of 2017 has imposed a limitation on deductions of
net operating losses to 80% of the taxable income (Gale et al., 2019). The change is contrasted to
previous legislations that allowed for net operating losses to be fully deductible. Still, the
legislation disallows the carrying back of unused losses which were previously allowed for 2
years. However, unused losses can be carried forward indefinitely hereby repealing the previous
provision of capping the time to 20 years. The changes in treatment of net operating losses and
interest deductions have significantly changed the administration of corporate law tax in the US.
Corporate Governance Reforms in the US
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The institution of corporate governance reforms in the US followed the series of
governance scandals that rocked the country at the turn of the century. Through these reforms,
the government increased is scrutiny on corporate boards and organizational structures. In turn,
the reforms are structured in the form of structural and procedural systems aimed at making
corporate boards more accountable. The passing of the Sarbanes-Oxley Act in 2002 marked the
single biggest form of corporate governance reform in the country. Through the Act,
organizations are required to make new more disclosures and abide to strict requirements
governing public companies (Ge and McVay, 2015). Still, Public companies and top executives
are also given greater liability under the federal securities laws. The reforms have also permeated
to the New York Securities Exchange which institutes more comprehensive reproving
requirements for public companies. Similar requirements have been implemented at the
Securities and Exchange Commission in an effort to enhance accountability and transparency in
information disclosure on corporate performance.
The country has recorded significant changes regarding director independence as well as
the responsibilities for different committees. Similarly, recent reforms in corporate governance
include those that seek to address the role of shareholders in approving equity compensation
plans. Payments made to directors and the certification of financial statements by company
executives also form part of the reforms made in recent years. The Sarbanes-Oxley Act provides
strict guidelines regarding the establishment of independent accounting oversight boards as well
as the process of making internal controls disclosures (Hann, 2011). The promotion of director
independence under the Act is based on the need to eliminate the management’s control and
power over the board of directors. The legislation acknowledges the potential for outside
directors having affiliations with the company thus undermining their potential for greater
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independence. Through requirements for independent directors, the legislation increases the
prospects of boards having better oversight while reducing the potential for conflicting interests.
The recent reforms in corporate governance enhance the quality of oversight among audit
committees through the requirement for independent directors. The composition and
responsibilities of audit committees are structured in ways that facilitate provision of
independent recommendation to board of directors. Still, the legislation provides significant
changes in the composition and functionalities of the compensation commie for public
companies. In turn, these reforms are based on the need to curb the rising compensation for top
executive officers and employees (Ge and McVay, 2015). The reforms in this respect provide
greater autonomy to compensation committees in their evaluation and recommendation of
compensation for company executives. In addition, the constitution of this committee is limited
to outside independent directors that have limited interests in the management of the company.
The independence of nominating committees is also guaranteed through the legislation as it
imposes the requirement for independent outside directors in the composition of this committee.
Ultimately, changes brought about by the corporate governance reforms increase the likelihood
of directors advocating for the interests of shareholders and other stakeholders.
Ownership Structure Reforms in the US
The US has also experienced significant ownership structure reforms and thus imposing
effects on businesses. According to Annuar, Salihu, and Obid (2014), ownership structure has an
inherent effect on the control of top management and tax avoidance strategies by extension. The
mediating role of ownership structure on tax avoidance policies is attributable to the overarching
influence hat powerful CEOs exert on company decisions. In part, the power of CEOs is partially
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determined by the ownership structure and their interest in the company’s stocks. In this regard,
organizations with founder CEOs that have significant levels of power may increasingly incline
towards tax avoidance policies as the executive seek to maximize their returns. This concept is
affirmed through the high number of organizations that are run by founder CEOs who double up
as the chairmen of board of directors. Ultimately, powerful executives provide significant
implications in the strategic and routine decision making processes in public organizations
including in decisions on tax avoidance.
The country’s reforms in ownership structure are guided by the Sarbanes-Oxley Act and
its requirements for greater accountability. Based on the reforms, the role of powerful executives
in policy and strategic decisions in public companies is significantly scrutinized. Through tax
avoidance, powerful executives and managers have the opportunity for diversion of corporate
resource for personal benefit. Through these reforms, the government has effectively sought to
reduce the concept of tax planning (Hann, 2011). In essence, powerful CEOs and especially
those that hold shares in the companies are likely to extort rent thus motivating them to engage in
tax planning decisions. The high costs of taxes on corporate organizations also facilitate
increased focus on tax planning among top executive managers. Consequently, powerful
executive officers engage in tax planning as a way of limiting tax expenses due for their
respective companies. Despite the institution of ownership structure reforms, the country has
increasingly adopted strategies that facilitate tax avoidance in public companies.
The exploitation of rent under the cover of tax avoidance by executives and managers is
prominent in US public companies. This approach limits the benefits of tax avoidance on
shareholders because the saved revenue does not trickle down to the owners of capital. In
addition, the ownership structure of organizations affects the motivation of tax avoidance based
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on the role played by owners in the management of organizations. In essence, companies that
have owners being executives or board chairs have a bigger prospect of avoiding taxes. As
pointed out in Wang et al. (2020), the motivation for tax avoidance among founder CEOs is
based on the direct benefits from tax savings. The high shareholding among founder CEOs
provide an incentive for tax avoidance to facilitate increased returns on investments. Ultimately,
the levels of tax aggressiveness and avoidance exhibited in public companies is largely
dependent on the ownership structures in these companies.
Theories on CEO Characteristics and Tax Avoidance
Agency Theory
The agency theory of corporate governance explains and resolve problems in the
relationship between business shareholders and employees. In business settings, the shareholders
represent the principals while the executives and employees formulae the agents working on
behalf of the principals. In this theory, the principals are the custodians of the business and have
delegated decision making authority to agents who are the executives. Based on the agents
making most of the decisions, there are often significant differences in priorities, opinions, and
interests (Panda and Leepsa, 2017). The agency theory acknowledges the fact that the interests of
shareholders are not always aligned to those of executives. Still, the theory identifies the agent as
using the resources of the principal based on the entrustment of these resources. The principal on
the other hand has limited day to day input in the management of the business making the agent
the decision maker. The theory however identifies the principal as having the biggest risk for
losses with the agent incurring very little risks.
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The agency theory further expects the agent to represent the best interests of the principle
and overlook personal interests in decisions making. The potential for the principal agent
problem is also envisioned through conflicts between agents and their principals. Based on the
problems envisioned in the theory, organizations experience moral hazards where ethical
individuals are exposed to the dangers of conflicted interests. Through incentives and directives,
the principal may avert further problems and redirect the beavers of the agents to align with the
interest of the principals. According to Lan and Heracleous (2010), the agency theory regards
firms as convergence points for contracting relationships between individuals. In turn, the theory
asserts that maximization of a firm’s value can only be realized when appropriate incentives and
adequate monitoring is effectively implemented to avert the use of personal discretion by agents
in maximizing their personal benefits. Thus, the need for contracts detailing duties, rewards, and
rights of the agents is necessary in maximizing value for the firms.
Stewardship Theory
The stewardship theory asserts that people are intrinsically motivated to work for others
in achieving encrusted tasks and responsibilities. In essence, the theory alludes to people being
collective minded rather than being individualistic in their execution of responsibilities. The
theory argues that intrinsic motivation towards working for an organization emanates from the
desire for attainment of higher levels of satisfaction. In essence, the stewards are identified as
achieving satisfaction and motivation from the attainment of organizational success. According
to Glinkowska and Kaczmarek (2015), stewardship theory identifies employees and executives
as stewards of shareholders and who maximize shareholder wealth through increased
productivity. In formulating the relationship between executives and shareholders, the theory
assumes that executives will always have the best interests of the shareholders in decision
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making. The characterization of managers and executives in companies as stewards assumes that
their interests are aligned to the interests of shareholders in maximizing profitability.
The stewardship theory further stresses the position of executives and employees acting
with greater autonomy to maximize shareholders’ returns. This theory assumes that all
employees assume their jobs in organizations and work at these jobs with high levels of
diligence. The theory therefore assert that shareholders should empower and trust their stewards
as a way of maximizing the performance of their firms. The provision of relevant incentives and
support is therefore central to the success of organizations. Besides, the theory also identifies the
role of stewards in the maximization and protection of shareholders’ wealth. According to the
theory, stewards or employees will often place greater value in pro-organizational behavior
rather than the fulfillment of self-serving behavior. Even when left alone, managers and
executives act as responsible stewards of the assets they have been entrusted to protect.
Ultimately, employees in an organization are motivated more by intrinsic rewards including
autonomy, satisfaction, mission alignment, and reciprocity.
Stakeholder Theory
The stakeholder theory is also significant in identifying and addressing corporate
governance challenges across firms. Indeed, the theory addresses corporate values and morals by
identifying stakeholders as being the primary beneficiaries from a business. In this theory,
shareholders are considered as only one among many stakeholders that must be served by a
business or organization. Under this theory, every individual or organization affected by the
existence and functioning of a firm is a stakeholder who is deserving of mutual respect. In turn,
this theory holds the view that organizations should endeavor to serve the interests of all its
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stakeholders as a way of achieving sustainability and profitability. Consequently, the theory
alludes to managers and executives having a myriad of relationships to serve including suppliers,
partners, and employees. Besides, the theory assumes that all interests from stakeholders are
similar and none should dominate the others in decision making.
The stakeholder theory is against the conceptualization of shareholders as more important
than other stakeholders in organizations. Consequently, the advancement of shareholders’
interests or the desire for profitability should not undermine the interests of other stakeholders.
According to Barney and Harrison (2020), the idea of maximizing profitability at all costs is
disregarded in the stakeholder theory based on the focus on all interests as equal. This theory
advances the need for consideration of all interest groups equally and the treatment of all the
parties with vested interest equally. This theory is increasingly gaining importance in
determination of ethical issues in business and organizational management. In turn, each
organization should endeavor to map out its stakeholders and consider their interests in the
running of the business. This theory further assumes that organizations would cease to exist
without the input and support of its stakeholders. Ultimately, the corporate environment is an
ecosystem of related groups whose interest should be considered in maintaining the health of an
organization.
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References
Annuar, H. A., Salihu, I. A., & Obid, S. N. S. (2014). Corporate ownership, governance and tax
avoidance: An interactive effects. Procedia-Social and Behavioral Sciences, 164, 150160.
Barney, J. B., & Harrison, J. S. (2020). Stakeholder theory at the crossroads. Business & Society,
59(2), 203-212.
Clausing, K. A. (2020). Profit shifting before and after the Tax Cuts and Jobs Act. National Tax
Journal, 73(4), 1233-1266.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2010). The effects of executives on corporate tax
avoidance. The accounting review, 85(4), 1163-1189.
Gale, W. G., Gelfond, H., Krupkin, A., Mazur, M. J., & Toder, E. J. (2019). Effects of the tax
cuts and jobs act: A preliminary analysis. National Tax Journal, 71(4), 589-612.
Gallemore, J., Maydew, E. L., & Thornock, J. R. (2014). The reputational costs of tax avoidance.
Contemporary Accounting Research, 31(4), 1103-1133.
Ge, W., & McVay, S. (2015). The disclosure of material weaknesses in internal control after the
Sarbanes‐Oxley Act. Accounting Horizons, 19(3), 137-158.
Glinkowska, B., & Kaczmarek, B. (2015). Classical and modern concepts of corporate
governance (Stewardship Theory and Agency Theory). Management, 19(2), 84.
Hann, D. P. (2011). Emerging issues in US corporate governance: Are the recent reforms
working. Def. Counsel J., 68, 191.
Lan, L. L., & Heracleous, L. (2010). Rethinking agency theory: The view from law. Academy of
management review, 35(2), 294-314.
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Li, Q., Ma, M. S., & Shevlin, T. (2021). The effect of tax avoidance crackdown on corporate
innovation. Journal of Accounting and Economics, 71(2-3), 101382.
Panda, B., & Leepsa, N. M. (2017). Agency theory: Review of theory and evidence on problems
and perspectives. Indian Journal of Corporate Governance, 10(1), 74-95.
Thomsen, M., & Watrin, C. (2018). Tax avoidance over time: A comparison of European and US
firms. Journal of International Accounting, Auditing and Taxation, 33, 40-63.
Wang, F., Xu, S., Sun, J., & Cullinan, C. P. (2020). Corporate tax avoidance: A literature review
and research agenda. Journal of Economic Surveys, 34(4), 793-811.
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Board Gender Diversity
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Board Gender Diversity
Moderating Role of Board Gender Diversity
The concept of gender diversity in boards has a moderating effect on the relationship
between CEO characteristics and tax avoidance. In essence, the levels of tax avoidance reduce
with increasing levels of gender diversity on the boards. This view is affirmed by Vacca et al.
(2020), who find that a higher number of women on the board helps in reducing tax avoidance
levels. The interaction is based on the role of the board of directors in determining corporate
strategies as well as the relevant disclosures in financial reporting. In turn, this influence affects
the characteristics of executive officers and their inclinations in decision-making. As noted in
Lanis, Richardson, and Taylor (2017), the presence of women on the board of directors reduce
the level of tax avoidance based on their relatively higher ethical values. Based on the findings in
his review, the study proposes the sixth hypothesis:
H6: Board gender diversity has a moderating effect on CEO characteristics and tax
avoidance relationships.
Data and Sample
The research study uses data from fifteen listed firms on the New York Stock Exchange.
The data were, thus, sourced through the ORBIS Bureau Van Dijk database using the criteria of
firms with sole operations in the US. Besides, the search criteria limited the search to companies
that have been in operation and listed on the New York Stock Exchange for at least three years
up to the 2021 financial year. Ultimate, the search resulted in 15 firms sourced from across
diverse industries in the United States. The firms included two companies with operations in the
field of artistic, sports and entertainment activities. Similarly, three companies were sourced
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from the real estate industry, while one more company was engaged in the accommodation and
catering service industry. Three companies were sourced from the manufacturing industry, with
another four working in wholesale and retail trade. The other two firms were engaged in the
transport and digital service provision.
Dependent Variables
Based on the objectives of this research, the study employed two critical dependent
variables, which are all sourced from the Compustat database. In particular, the first variable is
the total income tax expenses (TXT) against book income (PI). This variable is denoted through
the TXT/PI, with the first value including current and deferred values in its computation. The
variable name for the first variable is thus achieved in the form of GAAP ETR and represents an
effective tax rate as defined in the GAAP conventions. As noted in Beardsley, Mayberry, and
McGuire (2021), the effective tax rate is defined through the division of total income expenses
by pre-tax accounting income.
Additionally, the study employs another dependent variable based on interest in tax
avoidance. Consequently, this second dependent variable is the book-tax difference (BTD)
values of different firms under review. This value represents the difference between pre-tax
accounting income and the taxable income within an organization. Accordingly, the collective
book-tax differences across multiple companies result in a federal tax gap. The value of the
book-tax difference is thus achieved through the value of book income less the taxable income
scaled by lagged assets. The source of this dependent variable is the Compustat database.
Independent Variable
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The study also incorporates multiple independent variables in testing the interaction
between CEO characteristics and tax avoidance levels. One of the most significant variables
under review is the CEO duality which is based on the notion that it affects the appetite for tax
avoidance. This variable is represented through the value of CEOD and is determined through
the percentage of CEROs with duality. As noted in Dyreng, Hanlon, and Maydew (2010), the
duality of chief executive officers results in increased tax avoidance as the CEO plays the role of
administrator and oversight in their positions as members of the board.
The age of the chief executive is also a significant independent variable in the current
study. In essence, this variable represents the average age of chief executive officers in the
fifteen companies that will be under review in the current research. This variable will be
represented using the value of CEOA and will be significant in addressing the second hypothesis.
In essence, the inclusion of the variable is based on the fact that CEO’s age negatively impacts
tax avoidance through its influence on the organization’s internal tax policy. This variable will be
sourced from the Execucomp database.
Still, the gender of the CEO forms a significant independent variable in considering the
influence of CEO characteristics on tax avoidance. In the current study, the value will be
depicted through CEOG and will be derived from the Execucomp database. The value of the
attribute is defined through the percentage of chief executive officers identified as male across
the firms under review. As defined in Duan et al. (2018), the role of gender in determining tax
avoidance among CEOs is also based on the varied preferences for risk across men and women
in CEO positions.
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Finally, the nationality of the CEO is included as an independent in evaluating the
influence of CEO characteristics on tax avoidance levels. The variable is depicted through the
value of CEON and is sourced from the Execucomp database. In determining this value, the
study considers the average nationality of chief executive officers across the firms that are under
review. As noted in Astutik and Venusita (2020), the cultural inclination of CEOs from different
nationalities influences their view on tax avoidance and aggressiveness in corporate decisions. Its
inclusion in their study is thus qualified through its influence on tax policies within
organizations.
Moderating Variable
The relationship between CEO characteristics and tax avoidance levels is also moderated
by the variable of gender diversity on the board. According to Campbell andf Minguez-Vera
(2018), the gender diversiy of the board of directors is defined by the presence of female
directors within firms. This moderating variable is represented through the value of BGD and is
derived from the Bordeaux database. Its value is represented by the percentage of female
members on the board of directors for the respective companies under review. The inclusion of
this variable in the study is based on the notion that gender diversity reduces the levels of tax
avoidance in companies.
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References
Astutik, D., & Venusita, L. (2020). The Influence of CEO’s Demographic Characteristics on Tax
Aggressiveness in Family Firm. Jurnal Akuntansi dan Keuangan, 22(1), 1-9.
Beardsley, E. L., Mayberry, M. A., & McGuire, S. T. (2021). Street versus GAAP: Which
Effective Tax Rate Is More Informative?. Contemporary Accounting Research, 38(2),
1310-1340.
Campbell, K., & Mínguez-Vera, A. (2018). Gender diversity in the boardroom and firm financial
performance. Journal of business ethics, 83(3), 435-451.
Duan, T., Ding, R., Hou, W., & Zhang, J. Z. (2018). The burden of attention: CEO publicity and
tax avoidance. Journal of Business Research, 87, 90-101.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2010). The effects of executives on corporate
tax avoidance. The accounting review, 85(4), 1163-1189.
Lanis, R., Richardson, G., & Taylor, G. (2017). Board of director gender and corporate tax
aggressiveness: An empirical analysis. Journal of Business Ethics, 144(3), 577-596.
Vacca, A., Iazzi, A., Vrontis, D., & Fait, M. (2020). The role of gender diversity on tax
aggressiveness and corporate social responsibility: evidence from Italian listed
companies. Sustainability, 12(5), 2007.
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CEO Characteristics
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CEO Age
The age of the chief executive officers has a negative implication on tax avoidance
through its influence on tax policies within organizations. As noted in Duan et al. (20181), the
CEO age is significantly associated with tax rates that are consistent with accounting principles
on taxation. In turn, the age of the CEO negatively influences permanent book-tax differences,
thus contributing to variances in rates of tax avoidance across organizations. The view is further
affirmed by Hann (2011), who finds that younger CEOs to have a higher inclination towards
policies that reduce the tax burden on the organization and effectively supporting tax avoidance.
In contrast, older CEOs are not likely to engage in actions that seek to lower the tax burden for
the organization, thus reducing the prospects of tax avoidance.
The negative influence of age on tax avoidance is also based on the tenure of CEOs
within organizations. According to Duan et al. (2018), the tenure of CEOs has a negative
influence on publicity which in turn influences corporate tax avoidance. Consequently, CEOs
that have higher levels of publicity based on their long tenures are more careful and inclined
towards limited tax avoidance. In contrast, younger CEOs with low tenure have limited publicity
and are therefore more aggressive in adopting policies that support tax avoidance. Besides, the
management style of organizations is largely attributable to the biographic characteristics of
CEOs, including their age. In part, corporate decisions are more conservative when the age of the
CEOs is relatively higher, thereby impacting negatively on tax avoidance. Based on these
findings, we propose the second hypothesis.
H2: CEO age has a negative effect on tax avoidance.
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CEO Gender
Still, the gender of CEOs imparts a significant negative influence on tax avoidance.
According to Hann (2011), the gender of a CEO has a significant influence on tax aggressiveness
within organizations. In turn, tax aggressiveness across gender is based on the inclination of
CEOs toward risk-taking in tax policy decisions. The role of gender in determining tax
avoidance among CEOs is also based on the varied preferences for risk across men and women
in CEO positions. This view is affirmed by Duan et al. (20118), who observes that men and
women have different rates of avoiding risks in decision-making. Women CEOs are more likely
to avoid risks when making critical financial decisions compared to their male counterparts. It is
not surprising, therefore, that female CEOs are inclined towards low-risk tax decisions.
The inclusion of women in leadership has the prospect of reducing levels of tax
aggressiveness within organizations. According to Astutik and Venusita (2020), women CEOs
are more likely to reduce their levels of tax aggressiveness and effectively reduce prospects of
tax avoidance at the corporate level. In contrast, male executives are more willing to take risks
associated with tax avoidance compared to female executives. The low affinity for risk-taking
among female executives is based on the need to minimize the possibility of spending larger
amounts of money. Consequently, the gender of CEOs has an overarching influence on the
potential for corporate tax avoidance. The findings on the interaction between CEO gender and
tax avoidance affirm the third hypothesis.
H3: CEO gender has a negative effect on tax avoidance.
CEO Nationality
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The nationality of a CEO has a negative influence on tax avoidance based on the varied
cultural values. In particular, CEOs from different nationalities are likely to exhibit different
cultural values and inclinations, thus affecting their stance on tax avoidance. According to
Hofstede’s (1980) cultural framework, people from different nationalities exhibit a diversity of
cultures. In turn, the cultural inclination of CEOs from different nationalities influences their
view on tax avoidance and aggressiveness in corporate decisions. Measures of cultural values
and diversity include uncertainty avoidance levels as well as individualism scales in people.
Inherently, people with high levels of uncertainty avoidance and low levels of individualism
exhibit significant levels of tax avoidance. In turn, executives from nationalities with these
characteristics are likely to engage in activities that promote tax avoidance.
Still, the nationality of CEOs in organizations has an influence on their levels of
masculinity and power distance. In part, individuals that have low levels of masculinity and high
power distance may exhibit values that support a high affinity for corporate tax avoidance.
Similarly, the nationality of executives in corporate organizations influences their risk-taking
behavior and their affinity for tax aggressiveness. The value systems and cultural beliefs on the
morality of tax avoidance also impose significant influence on CEO decisions. In turn, the
nationality and associated values of CEOs have significant influences on tax policies. Based on
the findings of this literature review, we come up with the third hypothesis.
H4: CEO nationality has a negative effect on tax avoidance.
Moderating institutional ownership
5
Institutional ownership structure has an inherent effect on the control of top management
and tax avoidance strategies by extension. The mediating role of ownership structure on tax
avoidance policies is attributable to the overarching influence that powerful CEOs exert on
company decisions. In part, the power of CEOs is partially determined by the ownership
structure and their interest in the company’s stocks (Dyreng, Hanlon, and Maydew, 2010). In this
regard, organizations with founder CEOs that have significant levels of power may increasingly
incline toward tax avoidance policies as the executive seek to maximize their returns. This
concept is affirmed through the high number of organizations that are run by founder CEOs who
double up as the chairmen of the board of directors. Ultimately, powerful executives provide
significant implications in the strategic and routine decision-making processes in public
organizations, including in decisions on tax avoidance.
The role of CEOs in management and oversight as board chairpersons is also significant
in influencing tax avoidance policies. The duality of their roles in organizational management
and scrutiny provides a layer of protection that guarantees the validity of their decisions on tax
issues. In addition, the ownership structure of organizations affects the motivation of tax
avoidance based on the role played by owners in the management of organizations. In essence,
companies with owners being executives or board chairs have a bigger prospect of avoiding
taxes (Richardson, Wang, and Zhang, 2016). In essence, powerful CEOs and especially those
that hold shares in the companies, are likely to extort rent, thus motivating them to engage in tax
planning decisions. Consequently, powerful executive officers engage in tax planning as a way
of limiting tax expenses due to their respective companies. The theoretical and empirical
evidence justifies the proposal of the fifth hypothesis.
6
H5: Institutional ownership has a moderating effect on CEO characteristics and tax avoidance
relationship.
Moderating state ownership
The significance of state-owned firms in the global economy imparts a need for
understanding its mediating role in tax avoidance. In particular, the level of state ownership in an
organization influences the CEO’s characteristics and effectively impacts tax avoidance policies.
According to Annuar, Salihu, and Obid (2014), state-owned firms have lesser levels of tax
avoidance based on their association with the government. In essence, CEOs in these
organizations have higher affinities for overpaying taxes in an effort to appease political leaders
and public managers. The career prospects of executives in state-owned firms are largely
dependent on the government, thus motivating such CEOs to attract positive publicity. In this
regard, the contribution of CEOs towards increased tax revenue for the government imparts
positive career prospects.
The CEOs of state-owned firms have limited incentives for tax avoidance since
profitability is not the key indicator of good performance. In essence, state-owned firms incline
toward social services and not increased profitability, thus reducing the motivation for tax
avoidance. Moreover, the maintenance of government control on state-owned firms through the
appointment of bureaucrats affirms increased consistency to set guidelines and procedures
(Hilling et al., 2021). In turn, these organizations have limited flexibility in risk-taking and
creativity when reporting or adopting financial strategies. The CEOs appointed for state-owned
firms have characteristics that make them loyal to government operatives and thus reducing the
7
chances of tax avoidance. Ultimately, bureaucratic CEOs in state-owned firms have higher
political incentives that reduce the prospects of tax avoidance practices in the organizations. This
evidence affirms our sixth hypothesis.
H6: State ownership has a moderating effect on CEO characteristics and tax avoidance
relationship.
Summary
The management style of organizations is largely attributable to the biographic
characteristics of CEOs, including their age. In part, corporate decisions are more conservative
when the age of the CEOs is relatively higher, thereby impacting negatively on tax avoidance.
The role of gender in determining tax avoidance among CEOs is also based on the varied
preferences for risk across men and women. Besides, the cultural inclination of CEOs from
different nationalities influences their view on tax avoidance and aggressiveness in corporate
decisions. The mediating role of ownership structure on tax avoidance policies is attributable to
the overarching influence that powerful CEOs exert on company decisions. The duality of their
roles in organizational management and scrutiny provides a layer of protection that guarantees
the validity of their decisions on tax issues. Similarly, CEOs in state-owned organizations have
higher affinities for overpaying taxes in an effort to appease political leaders and public
managers.
8
References
Annuar, H. A., Salihu, I. A., & Obid, S. N. S. (2014). Corporate ownership, governance and tax
avoidance: An interactive effects. Procedia-Social and Behavioral Sciences, 164, 150160.
Astutik, D., & Venusita, L. (2020). The Influence of CEO’s Demographic Characteristics on Tax
Aggressiveness in Family Firm. Jurnal Akuntansi dan Keuangan, 22(1), 1-9.
Duan, T., Ding, R., Hou, W., & Zhang, J. Z. (2018). The burden of attention: CEO publicity and
tax avoidance. Journal of Business Research, 87, 90-101.
Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2010). The effects of executives on corporate tax
avoidance. The accounting review, 85(4), 1163-1189.
Hann, D. P. (2011). Emerging issues in US corporate governance: Are the recent reforms
working. Def. Counsel J., 68, 191.
Hilling, A., Lundtofte, F., Sandell, N., Sonnerfeldt, A., & Vilhelmsson, A. (2021). Tax avoidance
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Hofstede, G. (1980). Culture and organizations. International studies of management &
organization, 10(4), 15-41.
Richardson, G., Wang, B., & Zhang, X. (2016). Ownership structure and corporate tax
avoidance: Evidence from publicly listed private firms in China. Journal of
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