CEO overconfidence and IRS attention |
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Affiliation: | 1. Leicester Castle Business School, De Montfort University, Leicester LE1 9BH, United Kingdom;2. Leeds University Business School, University of Leeds, Leeds LS2 9JT, United Kingdom;3. DAN Department of Management and Organisational Studies, Western University, London, Ontario N6A 5C2, Canada;4. University of Bath School of Management, Bath, BA2 7AY, United Kingdom |
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Abstract: | We examine the likelihood that the US Internal Revenue Service (IRS), in its enforcement role, will accord particular attention to firms that are managed by CEOs who exhibit over-confidence, given that such CEOs may be more aggressive in their tax policies and strategies. Using data from 7757 firms, we find that this is indeed the case. Such attention is even more pronounced in the instance of overconfident CEOs whose firms are financially constrained and/or financially distressed. We also find that the IRS has augmented its audit processes to give more attention to overconfident CEOs during and post financial crisis. This may be due to the increased vulnerability of their firms to external shocks, which consequently increases the incentives to embark on tax avoidance strategies, value-destroying investments, and/or highly biased financial reporting (and forecasting responses) to tax authorities. Our results are robust after accounting for the possibility of endogeneity and using a wide range of specifications, measures, and econometric models. |
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Keywords: | Overconfidence IRS attention Financial constraints Financial distress Financial crisis |
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