Managerial acquisitiveness and corporate tax avoidance

Managerial acquisitiveness and corporate tax avoidance

This paper draws on the “tone at the top” literature to investigate whether managers of firms with managerial acquisitiveness also engage in corporate tax avoidance. Using a sample of US observations, we find that there is a statistically significant association between firm acquisition decisions and corporate tax avoidance. This finding remains robust in a series of sensitivity tests including controlling for the CEO's involvement in hyping stocks. We also show that the effect of acquisitiveness on tax avoidance is more prevalent when audit quality is low, CEOs' equity compensation is low and/or increases in post-acquisition period, and when firms announce acquisitions which destroy shareholder wealth, suggesting opportunistic behavior of CEOs is a key driver of tax avoidance. This finding is consistent with the idea that managers of firms that make self-maximizing decisions at the cost of shareholders in the form of high M&A activities within a short period of time are also engaged in tax avoidance. Consistently, further analysis shows that when high acquisitive managers implement tax avoidance, they destroy firm value in the post-acquisition period.

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