Economic Consequences of Tax Director Departure

• In Event: Dialogue 1

Abstract

Tax directors are responsible for monitoring compliance during the tax filing process, recommending investment decisions to minimize tax costs, and actively pursuing opportunities to achieve tax benefits in the course of tax planning (Armstrong, Blouin, and Larcker, 2012). However, agency problems occur due to the lack of transparency in a company’s tax reporting and the design of its compensation structure, which is linked to the tax rates of firms (Crocker and Slemrod, 2005; Hanlon and Heitzman, 2010). This study investigates economic consequences of tax director departure. In addition, we examine whether the market reactions to the departures of tax directors are associated with a specific individual characteristic (gender) and behavior (tax avoidance) of the director. Using a sample of 310 U.S. firms, we find weak and positive market reactions to the announcements of tax director departures. Our results further show lower cumulative abnormal returns for female tax directors than for male tax directors. However, the market does not react differently to the departures of tax directors who engage in tax avoidance. Our findings suggest that the market values tax director departures and their characteristic. We provide implications for practitioners in terms of the selection of tax directors and the engagement of tax avoidance.

Authors

• Wu-Po Paul Liu, National Cheng Kung University

• Mengyu Ma, University of Central Arkansas