Busted: Executive Misconduct and Its Implications for a Firm's Tax Avoidance

Abstract

The title of ‘CEO’ confers upon an individual considerable influence over his or her organization, from corporate culture to financial reporting. Prior research has documented that the individual acting as CEO has a significant impact on a firm’s tax planning activities – the degree to which tax is avoided and the aggressiveness of tax positions taken. With such power comes substantial responsibility – particularly in recent years, corporate CEOs have faced heightened scrutiny and accusations regarding personal behaviors outside of work. This thesis analyzes whether an accusation of personal misconduct against a CEO has a significant impact on the tax planning activities of his or her firm. Tax avoidance is an appropriate means through which to measure the impact that personal misconduct allegations against the CEO have on the business-related aspects of a company. In the context of ethical misconduct and the allegations that follow, tax avoidance is unique from other financial metrics in that it has strong ethical considerations. It may follow, therefore, that decisions made by a firm in light of alleged ethical violations by the CEO will be reflected in the firm’s tax planning. I hypothesize that perceived scrutiny against a CEO for personal misconduct will motivate the firm to perform less aggressive tax avoidance in the years that follow. I examine this hypothesis through a multi-year event study which compares the change in tax avoidance for firms that experienced a CEO “violation event” against firms that did not. Through correlation and regression analyses, my results do not show significant evidence that personal misconduct allegations against a CEO influence a firm’s level of tax avoidance. However, there still exists strong motivation for further research.