Managerial Ability and Tax Avoidance

• In Event: Tax

Abstract

We examine the relation between managerial ability and corporate tax avoidance. Using Demerjian et al. (2012) managerial ability measure, we find a negative and significant relation between managerial ability and tax avoidance. Our results are robust to a wide range of measures of tax avoidance and tax aggressiveness. We further find that the capital market reacts less negatively to tax sheltering news for firms led by more able managers than for firms led by less able managers. Overall, our results indicate that, given significant costs associated with tax avoidance activities, more able managers who can turnover firm resources into revenue through normal operations spend less effort in tax avoidance activities.

Authors

• Qiang Wu, Rensselaer Polytechnic Institute

• Xian Sun, Johns Hopkins University

• Bill Francis, Rensselaer Polytechnic Institute