New Research Shows Danger to CEOs when Firms Overpay, or Underpay, Taxes

September 20, 2018

 

Chief executive officers in corporate America are rarely experts in taxation, but they can still be held accountable for the firms’ tax outcomes, according to James Chyz, associate professor of accounting at the University of Tennessee, Knoxville’s Haslam College of Business and Neel Corporate Governance Center research fellow. New research by Chyz details how firms paying considerably more, or considerably less, taxes than their peer group contributes to the likelihood of a CEO being fired.

“There has been a maintained hypothesis in the literature that says CEOs might not be able to impact corporate tax outcomes; that it’s unlikely for them to be involved in the day-to-day operations of tax policy,” Chyz says. “Corporate boards are in charge of hiring and firing CEOs, and so the fact that we find some evidence that CEO departures are tied to corporate tax policy outcomes suggests that CEOs are being held accountable.”

To test the link between tax rates and CEO turnover, Chyz made use of a previously-existing data set of U.S.-based companies that covers approximately 15 years. The data separates out instances in which a CEO was fired from situations in which the CEO retired or left the firm for health reasons. He used statistical techniques to establish a correlation between the probability a CEO is fired and whether the firm is paying considerably higher or considerably lower taxes relative to its peers.

“If you’re paying too little tax, you’re bringing undue risk onto the firm,” Chyz says. “The IRS might want to collect back taxes with penalties, or you might get attention from the media and consumers. If you’re paying too much tax, that signals ineffective tax policy management. In that case, you’re paying more than you’re legally obliged to and having a wealth transfer from the shareholders to the government. That’s destructive to shareholder value.”

Chyz’s paper, “Can Paying ‘Too Much’ or ‘Too Little’ Tax Contribute to Forced CEO Turnover?” was co-authored with Fabio B. Gaertner of the University of Wisconsin-Madison and published in The Accounting Review in early 2018.