The impact of superstition on corporate tax avoidance: How do CEOs trade off risks associated with tax avoidance?

He, Guanming; Shen, Dongxiao

Abstract

Purpose
We examine how superstition shapes corporate tax avoidance and do so by taking a risk perspective and focusing on the zodiac-year belief prevalent in China.

Design/methodology/approach
We adopt a difference-in-differences research design to compare the degree of corporate tax avoidance in the CEOs’ zodiac year with that in the adjacent years. We do propensity-score matching to form a sample of Chinese listed firms for the regression analysis.

Findings
We find causal evidence that firms exhibit a greater magnitude of tax avoidance in the CEOs’ zodiac years, a result attributable to relatively weak tax enforcement in the Chinese context. We also find that the zodiac-year effect on corporate tax avoidance is more pronounced for firms with tight financial constraints, firms with high business risk, firms headquartered in regions with a high degree of superstition, and non-state-owned firms.

Originality/value
This study is the first to show that superstition is a determinant factor of tax avoidance, and contributes to the tax literature by shedding light on the behavioral risk factors that shape corporate tax avoidance. We take the perspective of CEOs’ risk appetite to analyze how tax avoidance is influenced by the CEOs’ trade-off between the costs and benefits of avoiding taxes. Our results suggest that, when CEOs in the Chinese firms are more risk-averse, they attach more importance to financial risk than the risk of reputational losses and litigation associated with corporate tax avoidance. The findings imply that tax avoidance can be curbed via increasing (decreasing) the tax (financial) risk confronting the CEOs.

Citation

He, G., & Shen, D. (online). The impact of superstition on corporate tax avoidance: How do CEOs trade off risks associated with tax avoidance?. Journal of Accounting Literature, https://doi.org/10.1108/JAL-02-2024-0020

• Journal Article Type: Article
• Acceptance Date: Aug 28, 2024
• Online Publication Date: Sep 16, 2024
• Deposit Date: Sep 12, 2024
• Publicly Available Date: Sep 13, 2024
• Journal: Journal of Accounting Literature
• Print ISSN: 0737-4607
• Electronic ISSN: 2452-1469
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1108/JAL-02-2024-0020
• Keywords: superstition; risk averseness; risk trade-off; corporate tax avoidance
• Public URL: https://durham-repository.worktribe.com/output/2861859