Abstract

This study examines the tax reporting behavior of overconfident CEOs. Relatedly, prior studies find a positive association between CEOs’ overconfidence and tax avoidance and conclude that optimistic CEOs tend to underestimate the potential risk of aggressive tax planning and to aggressively engage in it. However, the opposite argument is also supported that overconfident CEOs are less likely to engage in aggressive tax planning. Specifically, overconfident CEOs focus on attaining his optimistic expectation on earnings, which provide them with the incentives to inflate book earnings. Namely, they tend to put a greater weight on book earnings than on taxable income, and are likely to make a decision of paying taxes for inflated earnings. Thus, using a larger sample to compare to that of prior studies, we try to find the overall tendency of public firms related to the association between overconfident CEOs and corporate tax avoidance. Using 9,107 firm－year observations over 2000－2014, we find a negative association between overconfident CEOs and tax avoidance. This implies that overconfident CEOs are less likely to engage in aggressive tax planning. This is consistent with the argument that the benefit from reducing non－tax costs through earnings management exceeds the subsequent tax costs, and thus they tend to be less aggressive in tax planning. However, this result is not consistent with the findings of prior studies as mentioned the above. We attribute this inconsistency to the differences in the measures of overconfident CEOs and in the test samples. Furthermore, we find that the negative association between overconfident CEOs and tax avoidance is more prevalent for firms with younger CEOs than for firms with older CEOs. This study contributes to the literature by providing additional evidence on the effect of individual characteristics of CEOs on corporate tax behaviors.

Keywords

• CEO characteristics
• overconfidence
• tax avoidance
• tax planning

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