Chief executive officers may have little control over how much their companies pay in taxes, but new research shows that their continued employment may be tied to the amount.
A recently published study by James Chyz, associate professor of accounting in the University of Tennessee, Knoxville’s Haslam College of Business, shows that the likelihood of a CEO being fired increases if their firm pays considerably more or less in taxes than similar corporations.
“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 said. “Corporate boards are in charge of hiring and firing CEOs, 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 used an existing data set of US-based companies covering approximately 15 years. The data looks at instances in which a CEO was fired, as opposed to retiring or leaving the job for health reasons. He was able to establish a statistical correlation between a CEO’s being fired and the firm’s paying considerably higher or considerably lower taxes than its peers.
“If you’re paying too little tax, you’re bringing undue risk onto the firm,” Chyz said. “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.
Gerhard Schneibel (865-974-2894, email@example.com)
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