CEO Overconfidence and IRS Attention

Date

2022-06-17

Advisors

Journal Title

Journal ISSN

ISSN

1572-3089

Volume Title

Publisher

Elsevier

Type

Article

Peer reviewed

Yes

Abstract

We examine the likelihood that the US Internal Revenue Service (IRS), in its enforcement role, will accord particular attention to firms that are managed by CEOs who exhibit over-confidence, given that such CEOs may be more aggressive in their tax policies and strategies. Using data from 7,757 firms, we find that this is indeed the case. Such attention is even more pronounced in the instance of overconfident CEOs whose firms are financially constrained and/or financially distressed. We also find that the IRS has augmented its audit processes to give more attention to overconfident CEOs during and post financial crisis. This may be due to the increased vulnerability of their firms to external shocks, which consequently increases the incentives to embark on tax avoidance strategies, value-destroying investments, and/or highly biased financial reporting (and forecasting responses) to tax authorities. Our results are robust after accounting for the possibility of endogeneity and using a wide range of specifications, measures, and econometric models.

Description

open access article

Keywords

Overconfidence, IRS Attention, financial constraints, financial distress, financial crisis

Citation

Lartey, T., Uddin, M., Danso, A., and Wood, G. (2022) CEO Overconfidence and IRS Attention. Journal of Financial Stability, 61, 101035

Rights

Research Institute

Finance and Banking Research Group (FiBRe)