Managerial ability and tax aggressiveness

Abstract

The aim of this paper is to examine how managerial ability affects corporate tax aggressiveness. The study follows the work of Demerjian, Lev, and McVay (2012) and quantifies managerial ability by calculating how efficiently managers generate revenues from given economic resources using the data envelopment analysis (DEA) approach. The study uses a wide range of measures of tax aggressiveness. Firm fixed-effects regressions and a difference-in-differences approach using information regarding CEO turnover to control for endogeneity are used. The study finds a negative relationship between managerial ability and corporate tax aggressiveness. Further tests show that this negative relationship is more pronounced for firms with higher investment opportunities or firms with more reputational concerns. Given the significant costs associated with tax aggressiveness and the negative effect it can have on managerial reputation if discovered, the results suggest that more able managers invest less effort in aggressive tax avoidance activities. This study furthers the understanding of how managerial personal traits affect corporate decision-making.

Keywords

• managerial ability
• tax aggressiveness
• investment opportunities
• reputation costs