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Review of Quantitative Finance and Accounting
Published in:

05-07-2023 | Original Research

CEO marital status and corporate tax planning behavior

Authors: Ming-Hua Liu, Shaohua Tian, Yang Zhang

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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Abstract

This paper investigates the effect of the marital status of chief executive officers (CEOs) on their firms’ aggressive tax planning practices. Using a sample of S&P 1500 companies from 1996 to 2018, we find that firms led by unmarried CEOs exhibit a higher level of aggressive tax planning behavior than firms led by married CEOs after controlling for firm characteristics and CEO traits. This result is robust to alternative identification strategies including propensity-score-matching design, difference-in-difference approach, and instrumental variable technique. Moreover, the attenuating impact of CEO marriage on tax planning behavior is more pronounced among firms in non-consumer-oriented industries and when CEOs have a low pay-performance sensitivity. Further analysis of with-in CEO marital status variation shows that CEOs tend to be more tax aggressive after divorce. This study enhances our understanding of the corporate finance repercussion of CEOs’ personal traits and in particular of the wide variation of firms’ aggressive tax planning.
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Appendix
Available only for authorised users
Footnotes
2
The United States has the highest statutory corporate tax rate among developed countries. Even after deductions and other exclusions are taken into consideration, the (effective) tax rate is still among the highest. Therefore, CEOs, faced with intense pressure to maximize shareholders’ value, have incentives to shelter corporate income from taxes. For example, firms may set up subsidiaries in overseas countries with lower corporate tax rates, adopt accelerated depreciation deductions, take advantage of R&D and other tax credits, etc. While some tax positions may be legal and unlikely to be challenged by the Internal Revenue Service (IRS), others, for example, tax deduction for rent or interest paid or incurred in LILO (lease In/Lease Out) transactions, can be very aggressive and may not survive a challenge by the I.R.S. when the firm is audited.
 
3
While most CEOs are not tax experts, they can affect firm’s tax policy through two channels: 1) setting a ‘tone at the top’ of a firm by hiring or through policy changes, 2) having direct involvement in tax management strategies of the company (see Olsen and Stekelberg 2016). Dyreng et al. (2010) provided anecdotal evidence for the former, but did not identify any specific traits of CEOs as being behind the relationship.
 
4
In empirical tax accounting research, literature knows no universal approach and constructs frequently studied include tax avoidance, tax aggressiveness, tax sheltering and tax evasion. While some studies differentiate these terms and use effective tax rate (ETR) to measure tax avoidance, unrecognized tax benefits for tax aggressiveness and the standard deviation of ETR for tax risk and tax aggressiveness (e.g., Guenther et al. 2017), others do not. For example, firm’s cash ETR is also used as a measure of tax aggressiveness (e.g., Hanlon and Slemrod 2009).
 
5
Most existing studies on CEO marriage have relied on the dataset used by Roussanov and Savor (2014) (e.g., Hedge and Mishra 2019; Kim et al. 2021). Our data collection began prior to the availability of their data for public use. Moreover, their sample ends in 2008 while ours is till 2018. As a robustness check, we performed a cross check using their data and obtain consistent results (unreported).
 
6
With the simultaneous presence of taxes at the federal and state levels, firms are generally allowed to deduct state corporate income tax paid against federal taxable income. Such deductibility however is not homogeneous while some states allow full deductibility with other states 50%.
 
7
Ideally, a longitudinal study of with-in CEO marital transitions would provide direct evidence of its tax implication but data on such changes are not available. According to Hegde and Mishra (2019), the next best alternative is to investigate cases where marital transitions are accompanied with CEO succession.
 
8
We study firms that experience CEO transition and only the first transition is analyzed when there is more than one CEO transitions during the sample period and the transition year is included.
 
9
Here we focus on the ETR measures of tax avoidance for the DiD test as the transition sample using SC_UTB measures for tax aggressiveness is very small given the already limited observations for the SC_UTB measures to start with.
 
10
We thank Prof. Shushu Liao for sharing their list of divorced CEOs.
 
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Metadata
Title
CEO marital status and corporate tax planning behavior
Authors
Ming-Hua Liu
Shaohua Tian
Yang Zhang
Publication date
05-07-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01178-9

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