Overconfidence and Tax Avoidance: The Role of CEO and CFO Interaction

39 Pages Posted: 27 Sep 2016

See all articles by Tien‐Shih Hsieh

Tien‐Shih Hsieh

University of Massachusetts Dartmouth - Department of Accounting & Finance

Zhihong Wang

Clark University

Sebahattin Demirkan

University of Maryland

Date Written: September 25, 2016

Abstract

We investigate how top executives’ overconfidence may influence firms’ tax reporting behavior and the role of CEO and CFO interaction in this relationship. We adopt an equity measure to capture overconfident CEOs and CFOs, and utilize multiple measure to identify companies’ tax avoidance behavior. We find that companies with overconfident CEOs (CFOs) are more likely to engage in tax avoidance activities, relative to firms with non-overconfident CEOs (CFOs). We also document an interaction effect showing that companies with overconfident CEOs are more likely to engage in tax avoidance activities when these companies also have overconfident CFOs, relative to those with non-overconfident CFOs. Our results suggest that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions on tax avoidance. Our study helps investors and regulators understand companies’ decision-making processes with regard to tax avoidance.

Keywords: Tax avoidance, Overconfidence, CEO, CFO, Executive interaction

JEL Classification: H26

Suggested Citation

Hsieh, Tien-Shih and Wang, Zhihong and Demirkan, Sebahattin, Overconfidence and Tax Avoidance: The Role of CEO and CFO Interaction (September 25, 2016). Available at SSRN: https://ssrn.com/abstract=2843355 or http://dx.doi.org/10.2139/ssrn.2843355

Tien-Shih Hsieh

University of Massachusetts Dartmouth - Department of Accounting & Finance ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States

Zhihong Wang (Contact Author)

Clark University ( email )

950 Main Street
Worcester, MA 01610
United States

Sebahattin Demirkan

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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