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Board Chairs’ Early-Life Experience and Tax Avoidance

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Abstract

Understanding tax avoidance becomes a matter of significant interest as it is not just a financial problem but also an organizational ethical and integrity issue. This paper investigates the influence of the board chair’s early-life famine experience on corporate tax avoidance in China. We find a negative association between board chairs’ famine experience and tax avoidance. Our channel tests confirm that the two perspectives of “ethical altruism” and “risk aversion” explain this negative association. Further, the effect of the famine experience on tax avoidance is more pronounced in firms whose board chairs had the famine experience in their early childhood or adolescent years, suggesting that experiences in the childhood and adolescent periods have a greater ‘imprint’ on human behavior. Our study fills a critical gap in tax research by directly linking board chair life experiences to corporate tax practices, suggesting that early-life experience is an important determinant of tax behavior.

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Notes

  1. The Great Chinese Famine is regarded as one of the deadliest famines in human history. A notable number of people died from a string of natural disasters and starvation. We use exposure to this disaster as an exogenous shock to investigate the long-lasting effects of adversity in childhood years on individuals’ behavior.

  2. According to Hanlon and Heitzman (2010), tax avoidance relates to tax planning strategies ranging from tax inversions to illegal actions, such as evasion, excessive aggressiveness and sheltering. In this study, we adopt the definition proposed by Dyreng et al. (2008) which refers tax avoidance to all transactions that reduce companies’ tax obligations.

  3. Data source: https://www.scmp.com/economy/china-economy/article/3161742/chinas-tax-evaders-be-severely-punished-beijing-pushes-common.

  4. Owing to China’s family register system, China’s Great Famine did not lead to large-scale migration. This allows us to better identify the impact of board chairs’ famine experience (i.e., the severity of the experience) based on their birthplace (Feng and Johansson, 2018; Hu et al., 2020).

  5. We conduct the T-tests to compare firm attributes between the sample used and the firms excluded. The untabulated results show no statistical differences between final and excluded samples for most firm-level attributes.

  6. Listed companies in China can use either the tax payable method or the tax deferral method to account for income taxes until 2008, when China adopted International Financial Reporting Standards (Bradshaw et al., 2019; Tang et al., 2017). As an alternative test, we use income tax expense plus deferred tax as the numerator. The results remain essentially the same (untabulated).

  7. Owing to different family and socio-economic statuses, arguably, not all board chairs are equally affected by famine. However, to our knowledge, the board chairs’ family status data are unavailable in China. We acknowledge this is a limitation of our study. Nevertheless, we perform two additional analyses to test if board chairs’ birthplace can mitigate the influence of the famine. First, metropolitan areas, including Beijing, Shanghai, and Tianjin, were likely supplied with more food to maintain social stability during the famine (Feng and Johansson, 2018). We exclude board chairs born in these three metropolises and rerun the main model. We find that the coefficients on FAMINE are significantly positive. Second, Zhang (2017) suggests that board chairs born in urban or rural areas would be affected differently by the famine because government procurement policies during the famine period tend to favor urban areas in terms of food distribution. We divide the full sample into urban- and rural-born chairs and rerun the main model. Our results (untabulated) are robust for both subsamples.

  8. To compute the abnormal death rate, we first calculate the normal death rate as the mean value of the average death rate three years before the famine (i.e., 1956–1958) and the three years after the famine (i.e., 1962–1964) for each province. We then use the average death rate during the famine period (i.e., 1959–1961) minus the normal death rate, following Hu et al. (2020).

  9. We also introduce an alternative model specification to test the impact of the board chair famine experience by interacting famine age (FAMINE_AGE) with severity indicator (SEVERITY). Specifically, FAMINE_AGE is a dummy variable of one if the chair was born in 1961 or earlier and zero otherwise. SEVERITY is a dummy variable of one if the chair’s birth providence has an abnormal death rate higher than the sample median and zero otherwise. The interaction between FAMINE_AGE and SEVERITY captures the chair famine experience. The untabulated results from this alternative model specification are quantitatively similar to our main results.

  10. POWER is constructed based on the first principal component extracted from four distinct factors, including duality, ownership, tenure, and political connection. Furthermore, our results remain similar if we exclude firms whose chair is also the CEO. Moreover, we follow Xu and Ma (2022) and examine the moderating effect of POWER. The untabulated results show that the coefficients on FAMINE*POWER are positive and statistically significant at the 5% level, suggesting that when board chairs have a strong altruistic tendency, their relative power can guide them to avoid “tax avoidance.”

  11. Chongqing was part of Sichuan during the Great Chinese Famine, and it has become a province-level municipality since 1997.

  12. In addition to our main tax avoidance measures, we use four alternative measures that are commonly used in prior studies (e.g., Desai and Dharmapala, 2006; Dyreng et al., 2010; Tang et al., 2017; Wen et al., 2020; Wilson, 2009), namely, effective tax rate (ETR), the modified effective tax rate (METR), the permanent book-tax difference (BTD), and the discretionary book-tax difference (DDBTD). The untabulated results are quantitatively similar to those reported in Table 4, suggesting that alternative measures do not alter the inferences from our main tests.

  13. Owing to data limitations, we cannot obtain data on board chairs’ personal altruistic practices. Instead, we use corporate altruism as a reflection of chairs’ attributes.

  14. A CEO may also serve as the board chair (i.e., CEO duality). We run an additional analysis by excluding the observations of CEO duality. The sample is reduced to 10,314 observations. We find robust results (untabulated), showing that the CEO famine experience is not significantly associated with corporate tax avoidance. Furthermore, due to data limitations, our sample is reduced considerably to 501 observations when we require CFO age and birthplace data.

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Acknowledgements

All authors have made equal contributions to this paper. We thank for the constructive comments and suggestions from Charles Cho (the editor) and two anonymous reviewers.We also extend our thanks to Jodi Henry (discussant), Xiao Song (discussant), and participants at the 2022 AAA International Accounting Section Midyear Meeting, the 2022 Hawai’i Accounting Research Conference, and the 2022 Accounting & Finance Association of Australia and New Zealand (AFAANZ) Conference for providing us with their helpful feedback.

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  1. Dongbei University of Finance and Economics, Dalian, China

    Yukun Pan

  2. Nanjing Audit University, Nanjing, China

    Lin Liao

  3. Griffith University, Brisbane, Australia

    Daifei Yao

  4. The University of Memphis, Memphis, USA

    Joseph H. Zhang

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Appendix A

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Pan, Y., Liao, L., Yao, D. et al. Board Chairs’ Early-Life Experience and Tax Avoidance. J Bus Ethics (2023). https://doi.org/10.1007/s10551-023-05493-y

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  • DOI: https://doi.org/10.1007/s10551-023-05493-y

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