IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v54y2020i1d10.1007_s11156-019-00789-5.html
   My bibliography  Save this article

The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design

Author

Listed:
  • Ming-Chin Chen

    (National Chengchi University)

  • Chia-Wen Chang

    (Ming Chuan University)

  • Mei-Chueh Lee

    (Takming University of Science and Technology)

Abstract

Accounting expertise is closely related to corporate tax planning, and hence, corporate chief financial officers (CFOs) with accounting expertise may have advantages in exploiting tax planning opportunities. By manually collecting CFOs’ autobiographic information and identifying their accounting-related work experience, we empirically examine whether a CFO with accounting expertise is more likely than a CFO without such expertise to exploit tax planning opportunities, resulting in greater corporate tax avoidance. We find that CFOs with accounting expertise are negatively associated with corporate effective tax rates. The average effective tax rate of firms with accounting expert CFOs is approximately 19.4% lower than that of their counterparts with non-accounting expert CFOs, ceteris paribus. Moreover, the abnormal variable compensation of CFOs with accounting expertise is negatively associated with corporate effective tax rates. The results suggest that the accounting expertise and compensation schemes of CFOs can have a significant effect on the aggressiveness of corporate tax planning.

Suggested Citation

  • Ming-Chin Chen & Chia-Wen Chang & Mei-Chueh Lee, 2020. "The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 273-296, January.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:1:d:10.1007_s11156-019-00789-5
    DOI: 10.1007/s11156-019-00789-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-019-00789-5
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-019-00789-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Desai, Mihir A. & Dharmapala, Dhammika, 2006. "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, Elsevier, vol. 79(1), pages 145-179, January.
    2. Jean C. Bedard & Rani Hoitash & Udi Hoitash, 2014. "Chief Financial Officers as Inside Directors," Contemporary Accounting Research, John Wiley & Sons, vol. 31(3), pages 787-817, September.
    3. Chen, Shuping & Chen, Xia & Cheng, Qiang & Shevlin, Terry, 2010. "Are family firms more tax aggressive than non-family firms?," Journal of Financial Economics, Elsevier, vol. 95(1), pages 41-61, January.
    4. Bill Francis & Iftekhar Hasan & Jong Chool Park & Qiang Wu, 2015. "Gender Differences in Financial Reporting Decision Making: Evidence from Accounting Conservatism," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 1285-1318, September.
    5. Karen A. Bantel & Susan E. Jackson, 1989. "Top management and innovations in banking: Does the composition of the top team make a difference?," Strategic Management Journal, Wiley Blackwell, vol. 10(S1), pages 107-124, June.
    6. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    7. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    8. Carmen Cotei & Joseph Farhat, 2017. "The Leasing Decisions of Startup Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(04), pages 1-30, December.
    9. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    10. Kirsten A. Cook & G. Ryan Huston & Thomas C. Omer, 2008. "Earnings Management through Effective Tax Rates: The Effects of Tax†Planning Investment and the Sarbanes†Oxley Act of 2002," Contemporary Accounting Research, John Wiley & Sons, vol. 25(2), pages 447-471, June.
    11. Joel B. Slemrod & Marsha Blumenthal, 1996. "The Income Tax Compliance Cost of Big Business," Public Finance Review, , vol. 24(4), pages 411-438, October.
    12. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    13. Jiang, Fuxiu & Zhu, Bing & Huang, Jicheng, 2013. "CEO's financial experience and earnings management," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 134-145.
    14. Rachel M. Hayes & Scott Schaefer, 2000. "Implicit Contracts and the Explanatory Power of Top Executive Compensation for Future Performance," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 273-293, Summer.
    15. Adriana Cordis & Chris Kirby, 2018. "Income Shifting as an Aspect of Tax Avoidance: Evidence from U.S. Multinational Corporations," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(01), pages 1-53, March.
    16. Kelvin K. F. Law & Lillian F. Mills, 2017. "Military experience and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 22(1), pages 141-184, March.
    17. Heiner Schmittdiel, 2014. "Are CEOs incentivized to avoid Corporate Taxes? - Empirical Evidence on Managerial Bonus Contracts," Tinbergen Institute Discussion Papers 14-048/VII, Tinbergen Institute.
    18. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    19. Hoitash, Rani & Hoitash, Udi & Kurt, Ahmet C., 2016. "Do accountants make better chief financial officers?," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 414-432.
    20. McGill, Gary A. & Outslay, Edmund, 2004. "Lost in Translation: Detecting Tax Shelter Activity in Financial Statements," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(3), pages 739-756, September.
    21. Rani Hoitash & Udi Hoitash & Karla M. Johnstone, 2012. "Internal Control Material Weaknesses and CFO Compensation," Contemporary Accounting Research, John Wiley & Sons, vol. 29(3), pages 768-803, September.
    22. Banker, Rajiv D. & Lee, S.-Y.Seok-Young & Potter, Gordon & Srinivasan, Dhinu, 2000. "An empirical analysis of continuing improvements following the implementation of a performance-based compensation plan," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 315-350, December.
    23. Weili GE & Dawn Matsumoto & Jenny Li Zhang, 2011. "Do CFOs Have Style? An Empirical Investigation of the Effect of Individual CFOs on Accounting Practices," Contemporary Accounting Research, John Wiley & Sons, vol. 28(4), pages 1141-1179, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alaa Mansour Zalata & Collins G. Ntim & Mostafa Hussien Alsohagy & John Malagila, 2022. "Gender diversity and earnings management: the case of female directors with financial background," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 101-136, January.
    2. Yin Liu & Huiqi Gan & Khondkar Karim, 2021. "The effectiveness of chief financial officer board membership in improving corporate investment efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 487-521, August.
    3. Ming-Hua Liu & Shaohua Tian & Yang Zhang, 2023. "CEO marital status and corporate tax planning behavior," Review of Quantitative Finance and Accounting, Springer, vol. 61(4), pages 1207-1242, November.
    4. Yaşar Bayraktar & Asiye Tütüncü, 2022. "Does Tax Planning Affect R&D Expenditures? A Study of Borsa Istanbul (BIST) Manufacturing Sector," Istanbul Business Research, Istanbul University Business School, vol. 51(2), pages 563-581, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thomas R. Kubick & Yijun Li & John R. Robinson, 2020. "Tax-savvy executives," Review of Accounting Studies, Springer, vol. 25(4), pages 1301-1343, December.
    2. Gul, Ferdinand A. & Khedmati, Mehdi & Shams, Syed M.M., 2020. "Managerial acquisitiveness and corporate tax avoidance," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    3. Kovermann, Jost & Velte, Patrick, 2019. "The impact of corporate governance on corporate tax avoidance—A literature review," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 36(C), pages 1-1.
    4. Ke Na & Wenjia Yan, 2022. "Languages and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 27(1), pages 148-184, March.
    5. Allison Koester & Terry Shevlin & Daniel Wangerin, 2017. "The Role of Managerial Ability in Corporate Tax Avoidance," Management Science, INFORMS, vol. 63(10), pages 3285-3310, October.
    6. Florackis, Chris & Sainani, Sushil, 2021. "Can CFOs resist undue pressure from CEOs to manage earnings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    7. Baghdadi, Ghasan & Podolski, Edward J. & Veeraraghavan, Madhu, 2022. "CEO risk-seeking and corporate tax avoidance: Evidence from pilot CEOs," Journal of Corporate Finance, Elsevier, vol. 76(C).
    8. Duan, Tinghua & Ding, Rong & Hou, Wenxuan & Zhang, John Ziyang, 2018. "The burden of attention: CEO publicity and tax avoidance," Journal of Business Research, Elsevier, vol. 87(C), pages 90-101.
    9. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    10. Liu, Xiaoxia & Li, Minghui & Tong, Jamie Yixing & Zhang, Feida, 2022. "CFO gender and tax aggressiveness: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    11. Shams, Syed & Bose, Sudipta & Gunasekarage, Abeyratna, 2022. "Does corporate tax avoidance promote managerial empire building?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    12. Zheng, Suyan, 2017. "Can corporate diversification induce more tax avoidance?," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 47-60.
    13. repec:zbw:bofrdp:2016_005 is not listed on IDEAS
    14. Kelvin K. F. Law & Lillian F. Mills, 2017. "Military experience and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 22(1), pages 141-184, March.
    15. Caglio, Ariela & Dossi, Andrea & Van der Stede, Wim, 2018. "CFO role and CFO compensation: an empirical analysis of their implications," LSE Research Online Documents on Economics 88296, London School of Economics and Political Science, LSE Library.
    16. Paul Demeré & Michael P. Donohoe & Petro Lisowsky, 2020. "The Economic Effects of Special Purpose Entities on Corporate Tax Avoidance," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1562-1597, September.
    17. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate governance, incentives, and tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 1-17.
    18. Lee, Cheng-Hsun & Bose, Sudipta, 2021. "Do family firms engage in less tax avoidance than non-family firms? The corporate opacity perspective," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(2).
    19. Huang, Henry He & Lobo, Gerald J. & Wang, Chong & Xie, Hong, 2016. "Customer concentration and corporate tax avoidance," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 184-200.
    20. Anh Viet Pham & Mia Hang Pham & Cameron Truong, 2022. "CEO cultural heritage and the pricing of audit services," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 181-214, January.
    21. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian & Wu, Qiang, 2016. "CEO political preference and corporate tax sheltering," Bank of Finland Research Discussion Papers 5/2016, Bank of Finland.

    More about this item

    Keywords

    Tax avoidance; Effective tax rate; Compensation design; Chief financial officer;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:54:y:2020:i:1:d:10.1007_s11156-019-00789-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.