Tax Shelters, Reputational Costs and CEO Turnover: Evidence from Tax-Violating Enterprises in China

ABSTRACT

This paper investigates whether executives will bear reputational costs as a result of using tax shelters within different ownership structures. Based on tax-violation events of Chinese listed firms, we find that CEOs in state-owned enterprises are more likely to bear reputational costs than CEOs in non-state-owned enterprises and that the penalty on executives always occurs in the current year rather than in the subsequent year. In addition, the individual reputational cost of tax avoidance is related to tax aggressiveness and regulatory punishment. The more severe the tax aggressiveness or the regulatory punishment is, the greater the reputational cost of tax avoidance is for CEOs in SOEs. Our findings not only provide direct empirical evidence for the research on the corporate reputational costs of tax avoidance in an agency framework, but they also have great significance for understanding “the Under-Sheltering Puzzle.”

KEYWORDS:

• Tax shelters
• reputational cost
• tax aggressiveness
• regulatory punishment

Notes

1. Chyz and Gaertner (2018) found conclusions on CFO reputational cost similar to those obtained by their CEO analysis, while Liains et al. (2018) found that both independent directors and non-CEO executive directors are rewarded by improvements in their reputations for engage in tax avoidance, supporting the shareholder-centric view. We further test whether CFOs/directors will bear reputational penalties. Consistent with Gallemore, Maydew, and Thornock (2014), there was no evidence whether over a short- or long-window period.

Additional information

Funding

Dr. Na Wang thanks the support by the Ministry of Education of Humanities and Social Science (18YJC630182), Jiangsu Social Science Foundation Project (16EYC001), and the Fundamental Research Funds for the Central Universities (SK2016021).Dr. Liangliang Wang thanks the support by the National Natural Science Foundation of China (71502033 & 71972036), the Major Project of Philosophy and Social Science Research for Universities in Jiangsu Province (2019SJZDA025), the Fundamental Research Funds for the Central Universities (2242020R40106), the “Highest Good Young Scholars” Support Program of Southeast University, and the National Statistical Science Research Project (2019LY07).