CEO Political Affiliation and Firms’ Tax Avoidance

59 Pages Posted: 1 Mar 2012 Last revised: 21 May 2012

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Xian Sun

Johns Hopkins University - Carey Business School

Date Written: January 17, 2012

Abstract

This paper studies the effects of CEOs’ political preferences on corporate tax avoidance. CEOs’ party affiliations are identified by their political donations during election cycles. Using four measures of tax avoidance from the literature (book-to-tax difference, shelter activities, permanent tax avoidance, and total tax avoidance), we find that firms led by Republican CEOs have significantly higher levels of tax avoidance by all measures, as opposed to firms led by CEOs with no obvious political preferences. These differences are particularly true when the CEO’s equity-based incentives are low, suggesting that risk incentives do not drive our findings. On the other hand, Democratic CEOs are associated with higher book-to-tax difference and more shelter activities, especially when CEOs’ risk incentives are high. These results suggest that Republican CEOs’ tax decisions are driven by political preferences and that Democratic CEOs’ tax decisions are driven by risk incentives. We also find some evidence to support a view of Democratic CEOs as aggressive in making tax policies. The results of the firm and CEO fixed-effect regressions confirm that it is the Republican CEOs’ political preference that causes significant changes in terms of firm-level discretionary tax avoidance. A similar pattern does not hold for Democratic CEOs. The robustness analysis of the 2003 dividend tax cut suggests that the significantly higher tax avoidance associated with Republican CEOs is not driven by this policy change. Lastly, the fixed-effect of Republican CEOs on tax avoidance is especially significant among well-governed firms.

Keywords: Tax Avoidance, CEO, Political Affiliation

Suggested Citation

Francis, Bill B. and Hasan, Iftekhar and Sun, Xian, CEO Political Affiliation and Firms’ Tax Avoidance (January 17, 2012). Available at SSRN: https://ssrn.com/abstract=2013248 or http://dx.doi.org/10.2139/ssrn.2013248

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Iftekhar Hasan

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Xian Sun (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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