Overconfidence and Aggressive Corporate Tax Policy
University of Tennessee
Fabio B. Gaertner
University of Wisconsin - Madison - Department of Accounting and Information Systems
Nanyang Technological University (NTU)
University of Florida - Fisher School of Accounting
April 22, 2014
We investigate whether overconfident CEOs appear to not only pursue more aggressive tax positions but also evidence a tendency to assign high expectations of their final realizability, even if these positions were to be audited by a relevant taxing authority. In our empirical tests we first document positive associations between proxies for the aggressiveness of firms’ tax positions (tax aggressiveness) and overconfidence. We then test for associations between overconfidence and the reporting of uncertain tax benefits under a recently mandated disclosure for SEC filers that captures managers’ judgments on the realizability of tax positions assuming the positions were subjected to audit. Given prior research and our first set of findings, absent frictions such as overconfidence, the ex-ante expectation would be a positive association between uncertain tax benefits and overconfidence. Instead, we find that overconfidence is negatively associated with the magnitude of uncertain tax benefits recognized in the financial statements. This asymmetrical result between tax policy choices and the reporting of those choices by overconfident CEOs should be of interest to policy and rule makers and advances both overconfidence and tax aggressiveness literatures.
Number of Pages in PDF File: 43
Keywords: Overconfidence, Tax aggressiveness, FIN48
JEL Classification: D80, M40, H25working papers series
Date posted: March 14, 2014 ; Last revised: April 23, 2014
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