Tax Expertise of Corporate Executives and Tax Avoidance
Asian Tax Journal Vol. 16 No. 3 (2015), pp. 137-170
Abstract
This study examines whether tax expertise of top executives has an effect on corporate tax avoidance. As taxes are opaque by their nature, effective tax planning necessitates not only knowledge on tax law but also experience on various tax strategies enabling lower tax expense within legal boundary. By defining “tax－expert－executives” as executives who have professional tax experience in tax authority, such as NTS(National Tax Service), this study examines whether firms with tax－expert－executives show higher tax avoidance than firms without tax－expertexecutives. Also, we examine whether stock prices move differentially for tax avoidance of firms with tax－expert－executives compared to tax avoidance of firms without tax－expert－executives. To test these hypotheses, we use 3,069 firm－year observations (listed on KOSPI or KOSDAQ) for the period from 2004 to 2012. Using keyword searching on executives’ career database, we have classified executives with work experience in tax authority as tax－experts. For robustness of our results, we have used four different measures of tax avoidance. Main results of this paper are as follows. First, firms with tax－expert－executives have higher tax avoidance than firms without tax－expert－executives. This result is consistent with our prediction that tax－expert－executives use their tax－related knowledge and experience into conducting a more aggressive tax strategies. Second, where stock market prices do not react in consistent direction with tax avoidance, the reaction appears to be positive for firms with taxexpert－ executives. This result shows evidence that stock investors perceive the benefits of tax avoidance by firms with tax－expert－executives (i.e. lower tax expense leading to higher bottomline income) to be bigger than the possible non－tax costs (i.e. reputational costs or risk of tax investigation).
Keywords
- Tax Expertise
- Corporate Executives
- Tax Avoidance
- Market Reaction
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