Are Female CFOs Less Tax Aggressive? Evidence from Tax Aggressiveness
Bill Francis
Rensselaer Polytechnic Institute (RPI) – Lally School of Management & Technology
Iftekhar Hasan
Bank of Finland
Qiang Wu
Rensselaer Polytechnic Institute (RPI) – Lally School of Management
Meng Yan
Fordham University Schools of Business
April 23, 2014
This paper examines the impact of CFO gender on corporate tax aggressiveness. Prior studies find that there exists substantial variation in the level of firms’ tax avoidance (e.g., Dyreng et al. 2008). Researchers identify a wide range of firm characteristics and executive compensation incentives as determinants of tax avoidance. However, many determinants of this variation remain unclear (Weisbach 2002; Hanlon and Heitzman 2010). Dyreng et al. (2010) find that managerial fixed effects have significant explanatory power for firms’ tax avoidance. We extend this line of research and examine whether there are systematic differences in the choice of tax aggressiveness between female and male executives. Specifically, we examine whether female CFOs are associated with less tax aggressiveness as compared to their male counterparts.
The gender differences in risk-taking behaviors have been explored extensively in both the psychology and economics literature. Extant studies suggest that women in the general population are more risk averse than men. For instance, women tend to have less risky assets in their investment portfolios (e.g., Jianakoplos and Bernasek 1998; Sundén and Surette 1998; Bernasek and Shwiff 2001) and are more likely to maintain compliance with rules and regulations (e.g., Brinig 1995). However, the evidence is more mixed among professional management personnel. Some studies find that female executives are associated with less earnings management (Barua et al. 2010), more conservative accounting (Francis et al. 2013), and less risky financing and investment decisions (Huang and Kingen 2013). Others argue that women who are more risk-tolerant self-select into the managerial professions; thus, their risk preferences are not different from those of their male counterparts (e.g., Atkinson et al. 2003; Kumar 2010).
Tax aggressiveness refers to the most extreme subset of tax avoidance activities that, according to Hanlon and Heitzman (2010), are “pushing the envelope of tax law” (p.137). Aggressive tax positions are under scrutiny from auditors and tax authorities. When successfully challenged, firms may be subject to large penalties and negative publicity (Lisowsky 2009; Wilson 2009). Firms suspected of tax aggressiveness may bear political costs (Mills et al. 2013) and be labeled as “poor corporate citizens” (Hanlon and Slemrod 2009). In responding to a survey by Graham et al. (2013), 69% of tax executives agree that potential harm to their firms’ reputations is very important when deciding what tax planning strategies to implement. Since tax aggressiveness is more likely to reflect risk attitudes of top executives than are more certain tax avoidance activities, tax aggressiveness provides us a good setting to examine gender differences in risk-taking for managerial professions.
Empirical studies on gender issues often face the criticism that the observed differences are not attributable to gender, but instead to some omitted factors, such as situational factors and knowledge disparities (e.g., Dwyer et al. 2002; Atkinson et al. 2003). To mitigate this concern, we adopt a methodology similar to that used by Francis et al. (2013) and Huang and Kisgen (2013), which allows CFO gender effect to be idiosyncratic. We construct a sample of 974 firm-year observations with 92 cases of male-to-female CFO transitions. We then examine whether there is a significant difference in tax aggressiveness between the pre- and post-transition periods that can be attributed to a change in CFO gender.
Following Frank et al. (2009), Rego and Wilson (2012), and Boone et al. (2013), we use three measures to capture tax aggressiveness. The first measure is the probability of tax sheltering based on Wilson (2009), the second measure is the predicted unrecognized tax benefits following the prediction model in Cazier et al. (2009) and Rego and Wilson (2012), and the third measure is the discretionary permanent book-tax differences as defined by Frank et al. (2009).
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