Managerial Career Concerns and Corporate Tax Avoidance: Evidence from the Inevitable Disclosure Doctrine

Posted: 16 Aug 2021

See all articles by Ningzhong Li

Ningzhong Li

University of Texas at Dallas

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Weining Zhang

Cheung Kong Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 10, 2021

Abstract

While managers’ career concerns have been shown to be influential in shaping their decisions, there is little evidence of the impact such concerns may have on managers’ tax avoidance incentives. This study examines the causal effect of managers’ career concerns on tax avoidance using the staggered recognition by state courts of the inevitable disclosure doctrine (IDD), a trade secret protection doctrine which places greater restrictions on managers from joining or forming a rival company. We argue that the IDD recognition increases the cost of job loss for managers whose current jobs may be in jeopardy, thereby increasing their incentive to avoid taxes in order to positively change their current employer’s evaluation of their ability. The IDD recognition also reduces outside opportunities for high-ability managers, and thereby reduces their incentive to avoid taxes in order to positively change external employers’ evaluation of their ability. Using a difference-in-differences design, we provide evidence consistent with these predictions. We further show these effects are stronger for CEOs in their early years of service in the focal firms when the market is more uncertain about their ability. Our findings suggest that managers take into account the impact of tax avoidance on their career outcomes when making tax avoidance decisions.

Keywords: external employment opportunities, career concerns, inevitable disclosure doctrine, tax avoidance

JEL Classification: H26, M41

Suggested Citation

Li, Ningzhong and Shevlin, Terry J. and Shevlin, Terry J. and Zhang, Weining, Managerial Career Concerns and Corporate Tax Avoidance: Evidence from the Inevitable Disclosure Doctrine (August 10, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3904750

Ningzhong Li (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Weining Zhang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/FacultyResearch/Faculty/Accounting/ZhangWeining.aspx

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