Managers’ Personal Political Orientation and Corporate Tax Avoidance

Abstract:     
This study investigates whether managers’ personal political orientation helps explain tax avoidance at the firms they manage. Results reveal the intriguing finding that, on average, firms with top executives who lean toward the Republican Party actually engage in less tax avoidance than firms whose executives lean toward the Democratic Party. These findings are consistent with the argument that Republican managers’ preference for lower taxes is dominated by their desire to be conservative. Thus, the conservative tone at the top they set leads the firm to engage in less tax avoidance than firms that are run by Democrat managers. Additionally, we find that this effect appears to be driven by the subset of managers who are entrenched, which is consistent with managers having more freedom to imprint their personal preferences on firms with weaker governance. We also examine changes in tax avoidance around CEO turnovers and find corroborating evidence.

Keywords: tax avoidance, effective tax rate, politics

JEL Classification: H25, M41, G30

working papers series