How Does CEO Tenure Affect Corporate Income Tax Planning and Financial Reporting Decisions?

Abstract

This study examines whether corporate tax planning and financial reporting of income taxes vary systematically with CEO tenure. Using a CEO-firm fixed effects design, we find that the GAAP effective tax rate (ETR) is higher in the early years of the CEOs’ tenure and lowest in the last year of the CEOs’ tenure. In contrast, we find no difference in the cash ETR over the CEO’s tenure. These results suggest that the financial reporting of income taxes exhibits more variation over the CEO’s tenure than the underlying corporate tax planning and are consistent with managers being cautious in the financial reporting of income taxes early in their tenure. Further analysis shows that CEOs achieve these financial reporting outcomes in part by designating earnings as permanently reinvested and by using discretion in the reserve for uncertain tax benefits. These findings should be of interest to compensation committees and boards of directors, responsible for incentivizing and evaluating CEOs.