Corner-Cutters: Personally Tax Aggressive Executives and Corporate Regulatory Violations

Abstract

This study investigates the relation between personally tax aggressive executives and corporate regulatory violations across a wide range of areas. We identify personally tax aggressive executives as those who consistently make uncommonly well-timed corporate stock donations, which prior work has shown are the result of insiders exploiting their private information and/or fraudulently backdating gifts to dates with a high stock price. We hypothesize and find evidence that executives with a propensity to “cut corners” on tax laws also make corporate-level decisions leading to more regulatory violations, such as underinvesting in workplace safety and environmental protection measures. We find the link between tax aggressive executives and corporate violations is mitigated in the presence of strong outside monitors and influential stakeholders. Moreover, we find that violations rise (fall) when a tax aggressive executive joins (leaves) the firm, supporting a causal interpretation. Our study contributes to the literature by 1) introducing a novel approach to identifying personally tax aggressive executives that continues to be useful in the post-SOX era, and 2) providing evidence that such executives drive increased regulatory violations in a wide range of areas.