Brian M. Williams

How Does CEO Tenure Affect Corporate Income Tax Planning and Financial Reporting Decisions

This study examines whether corporate tax planning and financial reporting of income taxes vary systematically with CEO tenure. Using a CEO-firm fixed effects design, we find that the GAAP effective tax rate (ETR) is higher in the early years of the CEOs’ tenure and lowest in the last year of the CEOs’ tenure. In contrast, we find no difference in the cash ETR over the CEO’s tenure. These results suggest that the financial reporting of income taxes exhibits more variation over the CEO’s tenure than the underlying corporate tax planning and are consistent with managers being cautious in the financial reporting of income taxes early in their tenure. Further analysis shows that CEOs achieve these financial reporting outcomes in part by designating earnings as permanently reinvested and by using discretion in the reserve for uncertain tax benefits. These findings should be of interest to compensation committees and boards of directors, responsible for incentivizing and evaluating CEOs.

Who Invests in Corporate Tax Avoiders

We use data on individual investors’ stock holdings and retail trades to investigate whether corporate tax avoidance affects the willingness of individual investors to own stock. Consistent with corporate tax avoidance increasing the perceived risk of owning stock and the costs of processing financial information, we provide evidence that individual investors own less stock of firms that avoid more taxes and report more uncertain tax positions. We then examine whether investor sophistication and investment strategies impact individuals’ willingness to own stock in these firms. Our results suggest that more sophisticated investors and investors with shorter investment horizons own more stock in high tax avoidance firms, while more conservative investors own less. Overall, our findings are consistent with significant variation in how individual investors perceive corporate tax avoidance.

Are 'Tax Aggressive' Firms Just Inflating Earnings?

We investigate whether low Cash ETRs are associated with two distinct effects — tax avoidance and low earnings quality — and if so, whether the two effects can be separated. Separating these effects is important: if upward earnings management is driving low Cash ETRs, inferences based on tax avoidance may not be valid. Our results demonstrate Cash ETRs are associated with both earnings quality and tax avoidance. We test an alternative measure, the ratio of cash taxes paid to pretax operating cash flows, and provide evidence that this measure mitigates the association with earnings quality while retaining the association with tax avoidance.

Capital Gains Taxes and Risk with a Fixed Supply of Risky Assets

Economic theory has long argued that when risk-averse investors are price-takers, a tax on risky returns (with full tax benefit for losses) will cause investments in risky assets to increase because the tax reduces after-tax risk. We extend this result to a setting with a fixed supply of risky assets, so that the increased demand due to lower after-tax risk leads to an increase in price and a decrease in pre-tax returns. In this setting the tax-induced increase in demand for risky assets is mitigated by the lower pre-tax returns, and the increase is much smaller than predicted by previous models. Our results have important implications for understanding how taxes affect investor behavior and for studies in accounting that examine the effect of taxes on investments in risky assets.