Managerial ability and tax avoidance evidence from Europe

Prior studies model tax avoidance after firm characteristics without considering the effect of individual decision makers, or obtain contradictory results as to the effect of the ability of these individual decision makers on tax avoidance. This study investigates the effect of managerial ability on tax avoidance, presenting new empirical evidence from Europe. Our findings indicate that more able managers engage in greater tax avoidance, and that moving from the lower to the upper quartile of managerial ability in Europe is associated with a 1.84% reduction in a firm’s one-year cash effective tax rate. Further tests show that this result is robust to a wide range of robustness tests, methodological considerations, and alternative explanations. Our results also remain consistent when we attempt to reconcile with differing models who have previously obtained contradictory results. Furthermore, we examine the importance ascribed to tax avoidance by managers, finding that it is not a first order concern, but confirm that managers are incentivized to engage in tax avoidance. Finally, we explore the relationship between managerial ability and tax reforms, finding that the disparity in ability in regards to tax avoidance is most pronounced in low tax environments