Do Tax Directors Face Consequences from Tax Avoidance?

Abstract

I examine the association between tax avoidance and tax director turnover. Specifically, I hand collect the names of tax directors and explore whether tax directors face consequences from making certain tax avoidance decisions. This unique dataset allows me to examine the tax director, who is directly responsible for taxes, which are one of the most significant accounts, and who prior literature has largely ignored due to a lack of availability of data. I find evidence that the tax director is more likely to face consequences, as measured by turnover, when their firm’s effective tax rate is higher than the industry median’s effective tax rate and when the effective tax rate is volatile. Accordingly, these results provide an understanding of the consequences of tax directors’ tax avoidance decisions. In supplemental analysis, I examine samples of firms that engaged in aggressive tax avoidance, had tax-related restatements and had tax-related internal control weaknesses. I do not find evidence that tax directors face consequences, as measured by turnover, compared to a set of matched tax directors for any of the supplemental tests. Overall, these findings suggest that tax directors face consequences related to middle range tax avoidance decisions but do not face consequences from very aggressive tax avoidance and GAAP-related tax decisions.