Tax-savvy executives
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Tax-savvy executives Thomas R. Kubick 1 & Yijun Li 2 & John R. Robinson 3 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We investigate why firms include individuals with significant professional tax experience on their senior management team and the consequences associated with the presence of these tax-savvy executives. We find that past performance, network connections, geographic location, and tax-rate level, relative to industry peers, are all significant determinants of having a tax-savvy executive on the senior management team. Using propensity-score matching, we find that effective tax rates decrease substantially after the addition of a tax-savvy executive to senior management and revert following the departure of such an executive. We connect the changes in effective tax rates to changes in the usage of foreign subsidiaries in low tax jurisdictions. Keywords Corporate taxes . Effective tax rates . Employment history . Professional
experience JEL Classification G30 . H25, M12
1 Introduction This study investigates why firms include individuals with significant tax-related experience on the senior management team and the consequences associated with employing these tax-savvy senior executives. Despite a growing literature arguing that innate managerial characteristics (sometimes referred to as “manager fixed effects”)
* John R. Robinson [email protected] Thomas R. Kubick [email protected]
1
School of Accountancy, University of Nebraska – Lincoln, Lincoln, NE, USA
2
Erasmus University Rotterdam, Rotterdam, Netherlands
3
James Benjamin Department of Accounting, Mays School of Business, Texas A&M University, Mail Stop 4353 TAMU, College Station, TX 77843, USA
T. R. Kubick et al.
affect corporate policies, there has been little attention devoted to investigating the decision to employ senior executives with professional experience and specialized expertise (Dittmar and Duchin 2016). Furthermore, researchers know very litttle about whether and how an executive’s professional tax expertise influences corporate business strategies, financial policies, or firm performance. In this study, we provide empirical evidence identifying the factors associated with including experienced tax professionals in the senior management team and present evidence that, after controlling for these factors, the presence of a tax-savvy executive is associated with significantly lower subsequent GAAP and cash effective tax rates. In supplemental tests, we also find some evidence that the presence of tax expertise in senior management is associated with improved internal information quality and influences other nontax corporate policies. Corporate taxes provide a unique setting for examining the consequences of including executives with specialized experience in senior management. Specifically, taxes are one of the largest expense items on the income statement and are therefore highly visible to investors and regulators. Taxes are also very complex and present several important empirical pu
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