CEO Risk-Seeking and Corporate Tax Avoidance: Evidence from Pilot CEOs

44 Pages Posted: 28 Mar 2021 Last revised: 30 Aug 2022

See all articles by Ghasan Baghdadi

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance

Edward Podolski

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing; Financial Research Network (FIRN)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Date Written: August 30, 2022

Abstract

This paper investigates whether executives with risk-seeking tendencies engage in greater tax avoidance and find that CEOs who possess private pilot licenses (our proxy for risk-seeking) significantly reduce firm’s cash effective tax rate. Risk-seeking has a considerably stronger effect on tax avoidance compared with other commonly studied executive characteristics, including overconfidence and ability. Cross-sectional tests reveal that the baseline results are not sensitive to managerial remuneration incentives, suggesting that intrinsic incentives derived from endowed traits are not easily moderated by extrinsic motivation from compensation contracts. Additionally, we find that managerial oversight helps channel CEOs risk-seeking tendencies towards value creating tax planning endeavors. Further tests reveal that risk-seeking CEOs reduce effective tax rates only when they can engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which risk-seeking tendencies influence corporate tax planning activities.

Keywords: Risk seeking; Risk aversion; Thrill-Seeking; Tax avoidance; CEOs; Firm performance

JEL Classification: G30; G32; G34; G41

Suggested Citation

Baghdadi, Ghasan and Podolski, Edward and Veeraraghavan, Madhu, CEO Risk-Seeking and Corporate Tax Avoidance: Evidence from Pilot CEOs (August 30, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3785578 or http://dx.doi.org/10.2139/ssrn.3785578

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Edward Podolski (Contact Author)

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing ( email )

Australia

HOME PAGE: http://https://sites.google.com/site/edwardpodolskij/

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

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