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The Role of Managerial Ability in Corporate Tax Avoidance

Author

Listed:
  • Allison Koester

    (McDonough School of Business, Georgetown University, Washington, DC 20057)

  • Terry Shevlin

    (Paul Merage School of Business, University of California, Irvine, Irvine, California 92697)

  • Daniel Wangerin

    (Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

Abstract

Most prior studies model tax avoidance as a function of firm-level characteristics and do not consider how individual executive characteristics affect tax avoidance. This paper investigates whether executives with superior ability to efficiently manage corporate resources engage in greater tax avoidance. Our results show that moving from the lower to upper quartile of managerial ability is associated with a 3.15% (2.50%) reduction in a firm’s one-year (five-year) cash effective tax rate. We examine how higher-ability managers reduce income tax payments and find that they engage in greater state tax planning activities, shift more income to foreign tax havens, make more research and development credit claims, and make greater investments in assets that generate accelerated depreciation deductions. Identifying a manager characteristic related to firms’ tax policy decisions adds to our understanding of the factors that explain the substantial variation in corporate income tax payments across firms.

Suggested Citation

  • Allison Koester & Terry Shevlin & Daniel Wangerin, 2017. "The Role of Managerial Ability in Corporate Tax Avoidance," Management Science, INFORMS, vol. 63(10), pages 3285-3310, October.
    • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:10:p:3285-3310
    DOI: 10.1287/mnsc.2016.2510
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