The effect of contractual and behavioral CEO attributes on aggressive tax avoidance: case of German-listed firms in HDAX

Abstract

Purpose This paper aims to examine the effect of contractual factors and noncontractual factors on tax avoidance (TA). Design/methodology/approach The sample comprises 400 firm-year observations of 67 companies listed on the HDAX during the period 2008–2017. The generalized least square panel regression is applied. Findings The study results confirm a significant effect of long-term chief executive officer (CEO) compensation incentives and CEO attributes on TA. Findings exhibit a significant impact of foreign CEO on TA, whereas an insider CEO mitigates TA. The results hold for several robustness tests, with lag effective tax rate as dependent variable and with splitting foreign CEO into European and non-European origin. Research limitations/implications First, the sample is limited to 400 firm-year observations and to the German context. For shareholders, the study provides first evidence on relationships between the geographical and internal versus external labor market for CEOs and TA. For researchers, the findings underline the importance of integrating behavioral approaches like place attachment theory and the rooting theory in the theory of TA. Originality/value To the best of the authors’ knowledge, this is the first study to examine the impact of both contractual determinants and behavioral determinants on TA in the German context as an emerged economy with a dualistic corporate governance. This study contributes to the existing literature regarding the scientific debates about the impact of CEOs and CEO attributes on TA. It also analyses the balance between the place attachment theory and the rooting theory in the face of the compensation outcomes of agency theory.