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.
Similar content being viewed by others
Notes
The definition of bonuses in Execucomp includes the dollar value of a bonus (both cash and non-cash) earned by the named executive officer during the fiscal year.
References
Aier JK, Comprix J, Gunlock MT, Lee D (2005) The financial expertise of CFOs and accounting restatements. Account Horizons 19:123–135. https://doi.org/10.2308/acch.2005.19.3.123
Armstrong CS, Blouin JL, Jagolinzer AD, Larcker DF (2012) Corporate governance, incentives, and tax avoidance. J Account Econ 60:1–17. https://doi.org/10.1016/j.jacceco.2015.02.003
Baker TA, Lopez TJ, Reitenga AL, Ruch GW (2018) The influence of CEO and CFO power on accruals and real earnings management. Rev Quant Finance Account. https://doi.org/10.1007/s11156-018-0711-z
Bamber LS, Jiang J, Wang IY (2010) What’s my style? The influence of top managers on voluntary corporate financial disclosure. Account Rev 85:1131–1162. https://doi.org/10.2308/accr.2010.85.4.1131
Banker RD, Lee SY, Potter G, Srinivasan D (1996) Contextual analysis of performance impacts of outcome-based incentive compensation. Acad Manag J 39:920–948. https://doi.org/10.2307/256717
Banker RD, Lee S-Y, Potter G, Srinivasan D (2000) An empirical analysis of continuing improvements following the implementation of a performance-based compensation plan. J Account Econ 30:315–350. https://doi.org/10.1016/s0165-4101(01)00016-7
Bantel KA, Jackson SE (1989) Top management and innovations in banking: does the composition of the top team make a difference? Strateg Manag J 10:107–124. https://doi.org/10.1002/smj.4250100709
Barua A, Davidson LF, Rama DV, Thiruvadi S (2010) CFO gender and accruals quality. Account Horizons 24:25–39. https://doi.org/10.2308/acch.2010.24.1.25
Bedard JC, Hoitash R, Hoitash U (2014) Chief financial officers as inside directors. Contemp Account Res 31:787–817. https://doi.org/10.1111/1911-3846.12045
Bernard D, Matsumoto W, Toynbee S (2015) Are there costs to hiring an accounting expert CFO. Working paper. University of Washington, Washington, US
Bertrand M, Schoar A (2003) Managing with style: the effect of managers on firm policies. Q J Econ 118:1169–1208. https://doi.org/10.1162/003355303322552775
Carter ME, Lynch LJ, Tuna IR (2007) The role of accounting in the design of CEO equity compensation. Account Rev 82:327–357. https://doi.org/10.2308/accr.2007.82.2.327
Chen MC, Lin S, Chang T (2001) The impact of tax-exempt stock and land capital gains on corporate effective tax rates. Taiwan Account Rev 2:33–56
Chen S, Chen X, Cheng Q, Shevlin T (2010) Are family firms more tax aggressive than non-family firms? J Financ Econ 95:41–61. https://doi.org/10.1016/j.jfineco.2009.02.003
Combs JG, Skill MS (2003) Managerialist and human capital explanations for key executive pay premiums: a contingency perspective. Acad Manag J 46:63–73. https://doi.org/10.2307/30040676
Cook KA, Huston GR, Omer TC (2008) Earnings management through effective tax rates: the effects of tax-planning investment and the sarbanes-oxley act of 2002. Contemp Account Res 25:447–471. https://doi.org/10.1506/car.25.2.6
Cordis A, Kirby C (2018) Income shifting as an aspect of tax avoidance: evidence from US multinational corporations. Rev Pac Basin Financ Mark Policies 21:1–53
Core J, Guay W (1999) The use of equity grants to manage optimal equity incentive levels. J Account Econ 28:151–184. https://doi.org/10.1016/s0165-4101(99)00019-1
Core J, Guay W (2001) Stock option plans for non-executive employees. J Financ Econ 61:253–287. https://doi.org/10.1016/s0304-405x(01)00062-9
Cotei C, Farhat J (2017) The leasing decisions of startup firms. Rev Pac Basin Financ Mark Policies 20:1–30. https://doi.org/10.1142/S0219091517500229
Dalton DR, Kesner IF (1983) Inside/outside succession and organizational size: the pragmatics of executive replacement. Acad Manag J 26:736–742. https://doi.org/10.2307/255919
Desai MA, Dharmapala D (2006) Corporate tax avoidance and high-powered incentives. J Financ Econ 79:145–179. https://doi.org/10.1016/j.jfineco.2005.02.002
Dyreng SD, Hanlon M, Maydew EL (2010) The effects of executives on corporate tax avoidance. Account Rev 85:1163–1189. https://doi.org/10.2308/accr.2010.85.4.1163
Francis B, Hasan I, Wu Q (2013) The impact of CFO gender on bank loan contracting. J Account Audit Finance 28:53–78. https://doi.org/10.1177/0148558x12452399
Francis B, Hasan I, Park JC, Wu Q (2015) Gender differences in financial reporting decision making: evidence from accounting conservatism. Contemp Account Res 32:1285–1318. https://doi.org/10.1111/1911-3846.12098
Frank MM, Lynch LJ, Rego SO (2009) Tax reporting aggressiveness and its relation to aggressive financial reporting. Account Rev 84:467–496. https://doi.org/10.2308/accr.2009.84.2.467
Ge W, Matsumoto D, Zhang JL (2011) Do CFOs have style? An empirical investigation of the effect of individual cfos on accounting practices. Contemp Account Res 28:1141–1179. https://doi.org/10.1111/j.1911-3846.2011.01097.x
Gerhart B, Milkovich GT (1990) Organizational differences in managerial compensation and financial performance. Acad Manag J 33:663–691. https://doi.org/10.2307/256286
Hambrick DC, Mason PA (1984) Upper echelons: the organization as a reflection of its top managers. Acad Manag Rev 9:193–206. https://doi.org/10.5465/amr.1984.4277628
Hanlon M (2005) The persistence and pricing of earnings, accruals, and cash flows when firms have large book-tax differences. Account Rev 80:137–166. https://doi.org/10.2308/accr.2005.80.1.137
Hanlon M, Heitzman S (2010) A review of tax research. J Account Econ 50:127–178. https://doi.org/10.1016/j.jacceco.2010.09.002
Hansen V, Lopez TJ, Reitenga A (2017) The executive compensation implications of the tax component of earnings. Rev Quant Finance Account 48:557–595. https://doi.org/10.1007/s11156-016-0561-5
Hayes RM, Schaefer S (2000) Implicit contracts and the explanatory power of top executive compensation for future performance. RAND J Econ 31:273–293. https://doi.org/10.2307/2601041
Heckman JJ (1979) Sample selection bias as a specification error. Econometrica 47:153–162. https://doi.org/10.2307/1912352
Hogan TD, McPheters LR (1980) Executive compensation: performance versus personal characteristics. S Econ J 46:1060–1068. https://doi.org/10.2307/1057241
Hoitash R, Hoitash U, Johnstone KM (2012) Internal control material weaknesses and CFO compensation. Contemp Account Res 29:768–803. https://doi.org/10.1111/j.1911-3846.2011.01122.x
Hoitash U, Hoitash R, Kurt AC (2016) Do accountants make better chief financial officers? J Account Econ 61:414–432. https://doi.org/10.1016/j.jacceco.2016.03.002
Jiang F, Zhu B, Huang J (2013) CEO’s financial experience and earnings management. J Multinatl Financ Manag 23:134–145. https://doi.org/10.1016/j.mulfin.2013.03.005
Klassen KJ, Lisowsky P, Mescall D (2013) Corporation tax compliance: the role of internal and external preparers. Working paper. Universities of Calgary, Calgary
Kotter JP (1982) The general managers. Free Press, New York
Krishnan GV, Visvanathan G (2011) Is there an association between earnings management and auditor-provided tax services? J Am Tax Assoc 33:111–135. https://doi.org/10.2308/atax-10055
Lassila DR, Omer TC, Shelley MK, Smith LM (2010) Do complexity, governance, and auditor independence influence whether firms retain their auditors for tax services? J Am Tax Assoc 32:1–23. https://doi.org/10.2308/jata.2010.32.1.1
Law KKF, Mills LF (2017) Military experience and corporate tax avoidance. Rev Account Stud 22:141–184. https://doi.org/10.1007/s11142-016-9373-z
Lennox CS, Francis JR, Wang Z (2012) Selection models in accounting research. Account Rev 87:589–616. https://doi.org/10.2308/accr-10195
Matsunaga S, Yeung E (2008) Evidence on the impact of a CEO’s financial experience on the quality of the firm’s financial reports and disclosures. Working paper. University of Oregon and University of Georgia, Georgia
McGill GA, Outslay E (2004) Lost in translation: detecting tax shelter activity in financial statements. Natl Tax J 57:739–756. https://doi.org/10.17310/ntj.2004.3.13
McGuire ST, Omer TC, Wang D (2012) Tax avoidance: does tax-specific industry expertise make a difference? Account Rev 87:975–1003. https://doi.org/10.2308/accr-10215
Mehran H (1995) Executive compensation structure, ownership, and firm performance. J Financ Econ 38:163–184. https://doi.org/10.1016/0304-405x(94)00809-f
Mills L, Erickson M, Maydew E (1998) Investments in tax planning. J Am Tax Assoc 20:1–20
Omer TC, Bedard JC, Falsetta D (2006) Auditor-provided tax services: the effects of a changing regulatory environment. Account Rev 81:1095–1117. https://doi.org/10.2308/accr.2006.81.5.1095
Phillips JD (2003) Corporate tax-planning effectiveness: the role of compensation-based incentives. Account Rev 78:847–874. https://doi.org/10.2308/accr.2003.78.3.847
Rakhman F (2009) Earnings quality and CFO financial expertise. Oklahoma University, Parrington Oval
Rego SO (2003) Tax-avoidance activities of U.S. multinational corporations. Contemp Account Res 20:805–833. https://doi.org/10.1506/vann-b7ub-gmfa-9e6w
Robinson JR, Sikes SA, Weaver CD (2010) Performance measurement of corporate tax departments. Account Rev 85:1035–1064. https://doi.org/10.2308/accr.2010.85.3.1035
Schmittdiel H (2014) Are CEOs incentivized to avoid corporate taxes?-Empirical evidence on managerial bonus contracts. SSRN Electronic J. https://doi.org/10.2139/ssrn.2436101
Slemrod JB, Blumenthal M (1996) The income tax compliance cost of big business. Public Finance Q 24:411–438. https://doi.org/10.1177/109114219602400401
U.S. Congress Joint Committee on Taxation (1999) Study of present-law penalty and interest provisions as required by Section 3801 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Including provisions relating to corporate tax shelters). JCS 3-99. Government Printing Office, Washington, D.C
Weisbach D (2002) Thinking outside the boxes: a response to Professor Schlunk. Texas Law Rev 80:893–911
Wiersema MF, Bantel KA (1992) Top management team demography and corporate strategic change. Acad Manag J 35:91–121. https://doi.org/10.2307/256474
Acknowledgements
Ministry of Science and Technology, Taiwan (Grant No. 106-2410-H-130 -020 -)
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Chen, MC., Chang, CW. & Lee, MC. The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design. Rev Quant Finan Acc 54, 273–296 (2020). https://doi.org/10.1007/s11156-019-00789-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11156-019-00789-5