Overconfidence and tax avoidance: The role of CEO and CFO interaction

Document Type

Article

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.

Publication Title

Journal of Accounting and Public Policy

Publication Date

2018

Volume

37

Issue

3

First Page

241

Last Page

253

ISSN

0278-4254

DOI

10.1016/j.jaccpubpol.2018.04.004

Keywords

CEO, CFO, False Consensus Effect Theory, Upper Echelon Theory, overconfidence, tax avoidance

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