Overconfidence and tax avoidance: The role of CEO and CFO interaction |
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Authors: | Tien-Shih Hsieh Zhihong Wang Sebahattin Demirkan |
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Institution: | 1. Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747, USA;2. Graduate School of Management, Clark University, 950 Main St. Worcester, MA 01610, USA;3. The O’Malley School of Business, Manhattan College, 4513 Manhattan College Parkway, Riverdale, NY 10471, USA;4. Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, USA |
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Abstract: | We investigate how overconfident CEOs and CFOs may interact to influence firms’ tax avoidance. We adopt an equity measure to capture overconfident CEOs and CFOs and utilize multiple measures to identify companies’ tax-avoidance activities. We document that CFOs, as CEOs’ business partners, play an important role in facilitating and executing overconfident CEOs’ decisions in regard to tax avoidance. Specifically, we find that companies are more likely to engage in tax-avoidance activities when they have both overconfident CEOs and overconfident CFOs, compared with companies that have other combinations of CEO/CFO overconfidence (e.g., an overconfident CEO with a non-overconfident CFO), which is consistent with the False Consensus Effect Theory. Our study helps investors, regulators, and policymakers understand companies’ decision-making processes with regard to tax avoidance. |
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Keywords: | Tax avoidance Overconfidence CEO CFO False Consensus Effect Theory Upper Echelon Theory |
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