CEO NARCISSISM & CORPORATE TAX AVOIDANCE: University of Tilburg
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
CEO NARCISSISM &
CORPORATE TAX AVOIDANCE:
The moderating role of CEO duality
Tilburg University
Master Organization Studies
School of Social and Behavioral Sciences
Master Thesis
Name: N.A. (Naddie) Swagerman
Student number: 845672 / 2004404
Date: June 20, 2018
Circle supervisor: dr. T.P.L. Buyl
Secondary supervisor: dr. M.N. Meslec
MTO supervisor: dr. J. TijmstraBACKGROUND INFORMATION
Details of student: Name: N.A. (Naddie) Swagerman
ANR: 845672
SNR: 2004404
Supervisors: Circle supervisor: dr. T.P.L. Buyl
Secondary supervisor: dr. M.N. Meslec
MTO supervisor: dr. J. Tijmstra
Education details: Master Organization Studies
School of Social and Behavioral Sciences
Tilburg University
Title of thesis circle: “Soft” CEO characteristics and organizational outcomes
Title of thesis: CEO narcissism and corporate tax avoidance: the moderating role
of CEO duality
Date: June 20, 2018PREFACE
This dissertation was written on the occasion of the final part of the Organization Studies Master
at Tilburg University. The period in which the report was written is from October 2017 to June
2018. It was a trajectory in which all major issues related to research design, methods, and skills
in the field of organizational studies from my premaster and master program were used to fulfill
the final part. The process was guided by circle meetings with seven fellow students under the
guidance of dr. Tine Buyl.
During the past nine months, I have expanded my theoretical knowledge by conducting research
into issues such as CEO narcissism and corporate tax avoidance. I have experienced that my
interest was aroused by these topics by current events in the news, which ensures that my
theoretical research can also be linked to practice.
In general, I would like to thank all students of my thesis circle for the valuable feedback and
pleasant cooperation. In particular, I would like to thank dr. Jesper Tijmstra for giving feedback
on my method section and second reader dr. Nicoleta Meslec for investing the time to read my
thesis and get her valued opinions and feedback.
I would like to gratitude my thesis supervisor, dr. Tine Buyl, because I could not have done this
all by myself. She was a great help to me by always being a listening ear, patient, supportive,
and friendly. Moreover, she had a critical eye, which led in my opinion this thesis to a higher
level. She helped me in particular with my writing skills and she had an abiding faith in me,
even if things went less well. I appreciate this very much. Besides, I also benefitted from
debating issues with my friends and family, and my acknowledgment goes to those who were
willing to help me with giving extra feedback on my thesis. Overall, I am grateful that I have
been able to close this period with all mentioned helpful people.
I hope you will enjoy reading.
Warm regards,
Naddie Swagerman, Tilburg 2018
IABSTRACT
Corporate tax avoidance is a legal and quite frequent action for companies to obtain a better
financial position in recent years. According to some researchers, one piece of the puzzle in
corporate tax avoidance is the participation of the chief executive officer (CEO) in coming up
with tax strategies. Particularly, narcissism is seen as a major CEO characteristic, which is
associated with overconfidence, self-interest, and willingness to take risks. This study is,
therefore, an initial attempt to investigate the relationship between CEO narcissism and
corporate tax avoidance. CEO duality can be added as moderator in this relationship. CEO
duality implies that the CEO also acts as chairman of the board of directors, which can reinforce
the CEO’s power and freedom in the corporate decision-making process. Therefore, in this
study, it is expected that the positive relationship of CEO narcissism and corporate tax
avoidance will be strengthened by CEO duality. To conduct the analyses, data from 109 CEOs
working in three different industries in the United States is used. The data is collected using
methods from previously validated studies and theories in order to measure the mentioned key
concepts through frequently used databases. An ordinary least squared (OLS) regression is
conducted to examine the data. Results of this study revealed that no significant relationship is
found between CEO narcissism and corporate tax avoidance in general, but this relationship
depends heavily on the influence of CEO duality. On the one hand, when including CEO duality
as moderation effect, the relationship between CEO narcissism and corporate tax avoidance
becomes significant and positive. On the other hand, when there is no CEO duality, this
significant effect is less positive, or even negative. As a result, CEO duality is a crucial factor
for the organization itself to influence the relationship between CEO narcissism and corporate
tax avoidance.
Keywords: CEO, narcissism, corporate tax avoidance, tax strategies, corporate governance,
CEO duality
IITABLE OF CONTENT
PREFACE .................................................................................................................................. I
ABSTRACT ............................................................................................................................. II
LIST OF ABBREVIATIONS ................................................................................................ III
1. INTRODUCTION ................................................................................................................ 1
1.1 Problem indication ............................................................................................................ 1
1.2 Research relevance ........................................................................................................... 3
2. THEORETICAL FRAMEWORK ..................................................................................... 5
2.1 Corporate tax avoidance ................................................................................................... 5
2.2 CEO narcissism ................................................................................................................ 6
2.3 CEO narcissism and corporate tax avoidance .................................................................. 8
2.4 CEO duality ...................................................................................................................... 9
3. METHODOLOGY ............................................................................................................. 11
3.1 Research design .............................................................................................................. 11
3.2 Sample ............................................................................................................................ 11
3.3 Measures ......................................................................................................................... 12
3.3.1 Corporate tax avoidance measurement.................................................................... 12
3.3.2 CEO narcissism measurement ................................................................................. 13
3.3.3 CEO duality measurement ...................................................................................... 16
3.3.4 Control variables measurements ............................................................................. 16
4. RESULTS ............................................................................................................................ 18
4.1 Preliminary data analyses ............................................................................................... 18
4.1.1 Normal distribution ................................................................................................. 18
4.1.2 Factor analyses ........................................................................................................ 18
4.2 Descriptive statistics ....................................................................................................... 20
4.3 Bivariate correlation analysis ......................................................................................... 21
4.4 Linearity assumptions ..................................................................................................... 23
4.5 Multicollinearity ............................................................................................................. 24
4.6 Regression analyses ........................................................................................................ 25
4.7 Additional analyses......................................................................................................... 28
4.7.1 BTD and UTB as one measurement for corporate tax avoidance ........................... 294.7.2 Elimination of negative values of BTD ................................................................... 30
4.7.3 Alternative CEO narcissism measure ...................................................................... 32
4.7.4 Outliers MTB .......................................................................................................... 34
5. DISCUSSION ..................................................................................................................... 35
5.1 Key findings ................................................................................................................... 35
5.2 Theoretical implications ................................................................................................. 37
5.3 Practical implications ..................................................................................................... 37
5.4 Limitations and recommendations.................................................................................. 38
5.5 Future research ............................................................................................................... 39
6. CONCLUSION ................................................................................................................... 42
REFERENCES ....................................................................................................................... 43
APPENDICES ........................................................................................................................ 51
Appendix I Operationalization table ............................................................................ 52
Appendix II Skewness and Kurtosis level .................................................................... 55
Appendix III Histograms normal distribution ............................................................... 56
Appendix IV Factor analysis CEO narcissism ............................................................... 61
Appendix V Reliability analysis CEO narcissism ........................................................ 63
Appendix VI Standardized score CEO narcissism ........................................................ 64
Appendix VII Linearity plots .......................................................................................... 65
Appendix VIII Scatterplots ............................................................................................... 66
Appendix IX Variance Inflation Factor .......................................................................... 67
Appendix X Factor analysis corporate tax avoidance .................................................. 68
Appendix XI Standardized score corporate tax avoidance ............................................ 70
Appendix XII Regression corporate tax avoidance ......................................................... 71
Appendix XIII Regression without negative values of BTD ............................................ 73
Appendix XIV Regression negative values of BTD transformed into a value of zero ..... 75
Appendix XV Regression absolute values BTD .............................................................. 77
Appendix XVI Regression alternative CEO narcissism measure ..................................... 78
Appendix XVII Outliers MTB ........................................................................................... 85
Appendix XVIII Regression without MTB outliers ............................................................ 86LIST OF ABBREVIATIONS
BTD book-tax difference
CEO chief executive officer
CG corporate governance
LIWC linguistic inquiry and word count
NPI narcissistic personality inventory
MTB market-to-book
OLS ordinary least squared
ROA return on assets
UE upper echelons
UTB uncertain or unrecognized tax benefit
III1. INTRODUCTION
1.1 Problem indication
Corporate tax avoidance is becoming more of a common practice nowadays. Even well-known
companies such as Starbucks, Coca-Cola, and Google undertake (legal) actions to avoid
corporate taxes (FD, 2016). In this study, I define corporate tax avoidance as a legal practice to
reduce the taxable income of companies (Palan, 2002; Hanlon & Heitzman, 2010; Dyreng,
Hanlon & Maydew, 2008; Brown, 2011; Tresch, 2014). One example of a corporate tax
avoidance strategy is the offshoring of taxes via tax havens. Tax havens are countries which
distinguish themselves by the advantageous tax regimes that allow companies to be tax-efficient
(Palan, 2002). While this strategy is legal, it is difficult for legal authorities to control the tax
avoidance activities of the companies due to the lack of transparency and complexity of tax
legislation (e.g. tax loopholes and rules) (Dyreng et al., 2008). One way to assess organizations’
tax avoidance activities is by studying the difference between taxable and financial income; a
lower taxable income that is associated with an increased financial income might indicate
corporate tax avoidance (Hsieh, Wang & Demirkan, 2016). In simple words; companies strive
to reduce their tax payment (lower taxable income) by investing in tax avoidance strategies to
ultimately achieve a higher financial income. The gap between a lower taxable income and a
higher financial income thus indicates tax avoidance behavior (Dyreng et al., 2008).
Field evidence suggests that chief executive officers (CEOs) become more active in
identifying tax strategies, which indicates that they could be involved in actively searching for
tax avoidance tactics (Ernst & Young, 2004). In other words, CEOs devise strategies to
minimize their corporate taxes (Chyz, Gaertner, Kausar & Watson, 2014). According to
Dyreng, Hanlon, and Maydew (2010), CEOs have an individual effect on companies’ tax
avoidance activities. They can influence corporate tax avoidance because they set the tone, have
a dominant position, and therefore have the power to make strategic decisions and ultimately
determine the path that leads the organization (Dyreng et al., 2010). This aligns with the upper
echelons (UE) perspective of Hambrick and Mason (1984) which highlights the impact of CEOs
on corporate strategies in general. More specifically, UE theory suggests that executive
characteristics (personality, values, and cognitive base) are reflected in organizational outcomes
(Hambrick & Mason, 1984). Building on the UE perspective, this study will focus on the degree
to which corporate tax avoidance can be explained by a particular CEO characteristic: CEO
narcissism.
1Narcissism is investigated in many studies and is seen in particular as a threat for
companies because narcissists often only have an eye for their own interests, which strengthens
their own image (Vazire, Naumann, Rentfrow & Gosling, 2008). CEO narcissism includes a
belief in one’s superior qualities; this results in narcissistic CEOs having more confidence in
their own tasks (Chatterjee & Hambrick, 2007). Furthermore, narcissists have an intense need
to reconfirm their superiority and strive for further admiration. Attention often has to come
from an external audience in the form of confirmation, applause, and adulation (Wallace &
Baumeister, 2002; Bogart, Benotsch & Pavlovic, 2004). This enables CEOs to take challenging
actions with the aim of receiving frequent praise and admiration (Rijsenbilt & Commandeur,
2013).
Therefore, CEO narcissism is associated with overconfidence, self-interest, and
willingness to take risks (Ham et al., 2017). Narcissistic CEOs are aggressive in pursuing what
they believe, hence it may be the case that they will attempt to take advantage of tax avoidance
strategies (Olsen & Stekelberg, 2016). Highly narcissistic CEOs are more prone to “play loose
with the company’s reported financial position in order to shun remediation strategies and to
live in a fantasy world of delusion about the company’s financial strength” (Amernic & Craig,
2010, p. 80). Because narcissistic CEOs live in a fantasy world and think they are superior, they
feel that they can make the difference within the organization. As a result, narcissistic CEOs
desire to improve their own and the company’s image, which is why it is expected in this study
that they will actively avoid taxes to seek a better financial position. In line with this
expectation, narcissism has been linked to (legal) manipulation of financial results to achieve a
better financial reputation (Olsen & Stekelberg, 2016). Therefore, in this study, I expect a
positive relationship between CEO narcissism and the avoidance of corporate taxes.
Organizations’ corporate governance (CG) practices are also crucial in this matter as
they could be expected to strengthen or weaken the effect of CEOs’ actions on organizational
outcomes (Ocasio, 1999). The way in which a company is organized, managed, and controlled
is strongly determined by CG. CG is exercised by a firm’s board of directors and one of their
responsibilities is to control the actions of the CEO (Core, Holthausen & Larcker, 1999). One
dimension of CG is CEO duality which implies that the CEO also acts as chairman of the board
of directors (Rijsenbilt, 2011). Prior literature proposes contrasting effects of CEO duality. On
the negative side, duality can firmly anchor a CEO at the top of an organization and challenge
the ability of a board to effectively control and discipline (Finkelstein & D’aveni, 1994). On
the positive side, CEO duality provides a unit of command at the top of the company, whereby
2unambiguous leadership clarifies the decision-making power and sends reassuring signals to
stakeholders (Solomon, 2007). However, both perspectives support the reasoning that CEO
duality increases CEOs’ power or impact and that it is, therefore, attractive to study (Finkelstein
& D’aveni, 1994). When the CEO can play a dual role, i.e. CEO and chairman of the board of
directors, his or her power will be reinforced. CEO duality can stimulate CEOs to act in their
own interests, which can lead to a stronger position in strategic decision-making (Davis et al.,
1997). Therefore, in this study, it is expected that the relationship between CEO narcissism and
corporate tax avoidance will be even stronger in case of CEO duality.
The research question is as follows: “To what extent does CEO narcissism affect corporate tax
avoidance and to what extent does CEO duality moderate this relationship?”. Figure 1 depicts
the conceptual model that guides this study.
Corporate Governance:
CEO Duality
+
CEO Narcissism + Corporate Tax
Avoidance
Figure 1: Conceptual model
I empirically test the conceptual model in a sample of 109 CEOs located in the Prepackaged
Software (SIC code: 7372), Crude Petroleum & Natural Gas (SIC code: 1311) and
Pharmaceutical Preparations (SIC code: 2834) industries in the United States. The reason for
analyzing these industries is the substantial numbers of publicly-held firms. The results provide
partial support for the hypothesized effects: while I do not find support for the direct
relationship between corporate tax avoidance and CEO narcissism, the prediction that CEO
duality moderated this relationship is confirmed. Moreover, the results show that when CEO
duality is absent, the relationship between CEO narcissism and corporate tax avoidance is
negative. In the discussion section, I further explain and interpret the findings.
1.2 Research relevance
This study provides insights into how CEOs, depending on their degree of narcissism, engage
in tax avoidance. The concept of narcissism is acknowledged by many studies (Wales, Patel &
Lumpkin, 2013; Judge, Picollo & Kosalka, 2009; Back et al., 2013; Olsen & Stekelberg, 2016),
but it is still largely overlooked in the existing research on corporate tax avoidance. Corporate
3tax avoidance is an important phenomenon to study since these strategies also seem to have
dark sides and negative consequences. As a result, it is important for society to better understand
which antecedents there are and how corporate tax avoidance could possibly be prevented by
organization’s CG. Although corporate tax avoidance strategies are often legal in the strict
sense, they might damage an organization’s reputation (Austin & Wilson, 2015). Many
companies and individuals who pay taxes become frustrated that certain multinationals are able
to avoid corporate taxes. Furthermore, corporate tax avoidance is a societal concern because it
is embedded in our society and, based on social norm theory, the practice is considered to be
wrongdoing since it imposes costs on society (Lee, Lim, Kanagaretnam & Lobo, 2014). The
United States’ former President Barack Obama points out that: “The problem is that a lot of this
stuff is legal, not illegal” (The Guardian, 2017). Therefore, despite the fact that avoidance of
tax is technically legal, there is still discussion about whether it is ethical within society (Melo
Parreira Filho, 2014). To take action against tax avoidance, I found in this study that corporate
taxes might be (mainly) prevented at an organizational level by engaging in CG. CG gives
insights into how an organization’s board can reel in potentially harmful behaviors – such as
engaging in tax avoidance – of narcissistic CEOs. By including CEO duality (as one dimension
of CG) as a moderation effect, it can be established that the organization’s CG plays an
important role in the relationship between CEO narcissism and corporate tax avoidance.
42. THEORETICAL FRAMEWORK
2.1 Corporate tax avoidance
Multiple definitions for corporate tax avoidance are created by academic researchers and were
found during literature review. Palan (2002) defines corporate tax avoidance broadly in terms
of a combination of a lower taxable income and an increased financial income. This means that
companies reduce their taxable income by paying attention to advantageous tax strategies in
order to pay less tax, as a result, companies obtain a higher financial income. The decreased
taxable income and the increased financial income can thus be considered as tax avoidance
behavior (Dyreng et al., 2008). Hanlon and Heitzman (2010) specify corporate tax avoidance
“as the reduction in explicit taxes” (p. 27). Furthermore, Dyreng et al. (2008) suggest that
corporate tax avoidance is anything that reduces a firm’s taxes relative to its pretax accounting
income. According to Brown (2011), tax avoidance is a method to effectively decrease the
amount of tax by paying attention to tax minimization strategies. Finally, Tresch (2014)
explains that corporate tax avoidance refers to “taxpayers taking advantage of the provisions of
the tax laws to reduce their tax liability, such as arranging to take income in the form of lightly
taxed capital gains” (p. 512). The connecting thread in all definitions is that it is about practices
for (legally) lowering companies’ taxable income.
In addition to the various definitions of corporate tax avoidance, it is often unclear, by
society, where the dividing line is between legal and illegal tax activities. The boundaries
between tax avoidance (a legal practice) and tax evasion (a criminal activity) can be vague. In
the literature, corporate tax avoidance refers to the legal method to change downward the
financial situation of an organization to reduce the amount of tax being paid (Olsen &
Stekelberg, 2016; Capaldi, Fifka, Zu & Schmidpeter, 2015; Tresch, 2014), whereas, tax evasion
refers to illegal practices of an organization to deliberately misrepresent or hide the real state
of its affairs to tax authorities (Slemrod & Yitzhaki, 2002). Examples of tax evasion are the
failure to report the total taxable income or making incorrect tax returns, while corporate tax
avoidance is focused more on changing business structure or establishing a company in a tax
haven (where corporate tax is low) or tax deductions in order to lower tax liability (Slemrod &
Yitzhaki, 2002).
Addressing the covert forms of corporate tax avoidance, such as changing business
structures and tax havens, is difficult because of its complex tax structure and non-transparent
character. This study, therefore, builds on economic literature about how corporate tax
5avoidance can be assessed via transparent financial transactions of companies (Wang, 2011). I
will focus on tax deductions in order to lower the tax liability or to postpone the company’s
payment, what is referred to as an overt form of corporate tax avoidance (Dyreng et al., 2008).
Tax deduction becomes apparent in the difference between taxable income and book income
and the reduction of tax expenditures for financial accounting purposes (Lisowsky, Robinson
& Schmidt, 2013). Hence, I address the extent to which tax is avoided by companies using overt
and transparent measurements in this study.
When it comes to corporate tax avoidance, CEOs are important actors because they
decide on strategic issues (Hambrick & Mason, 1984). In general, the actions of CEOs seem to
be designed to reduce the amount of corporate tax avoidance through tax activities, which has
become a general feature of today´s business landscape (Lanis & Richardson, 2011). Within
the business landscape, the shift of the tax systems has been made possible by the expansion of
globalization and digitalization (Cavelti, 2013). The shift of the tax systems involves the
advantage of inequalities between national tax systems in order to reduce the tax being paid by
companies. Some companies have learned how to exploit globalization and digitalization in
every way, including exploiting the loopholes that enable them to avoid their corporate taxes
(Lanis & Richardson, 2011). Probably partly due to the complexity of tax legislation, it can be
difficult for companies to participate in tax avoidance strategies. Therefore, at first thought, it
may be difficult to imagine that a CEO has an individual effect on the tax avoidance of the
company. Nonetheless, according to Dyreng et al. (2010), CEOs understand the main concepts
of tax avoidance through their interest in high-risk areas. Because a CEO’s interest in risks is
likely to depend on his or her personality, I expect that the CEO’s degree of narcissism will be
relevant.
2.2 CEO narcissism
In this study, I will investigate CEO narcissism, which refers to the degree to which the CEO
is interested in him or herself (Rijsenbilt, 2011). The concept of narcissism emerged a century
ago in psychology literature and the term is originally described as perverse self-love (Ellis,
1898; Freud, 1914). The concept of narcissism is widely used (Rijsenbilt & Commandeur,
2013) and is, according to some researchers, a trait which has both ‘bright’ and ‘dark’ sides
(Wales, Patel & Lumpkin, 2013; Judge, Picollo & Kosalka, 2009; Back et al., 2013; Olsen &
Stekelberg, 2016).
6On the bright side, Maccoby´s (2000) study shows that many narcissistic CEOs lead
highly successful organizations because they can shape the future and inspire people. In leading
these successful organizations, they are seen as charismatic leaders since they possess personal
characteristics such as being daring, lacking fear, being passionate, and being willing to take
risks (Braun, 2017). Narcissistic CEOs have the desire to compete and be the center of attention;
in order to meet these needs, they are likely to undertake more risky actions (Ham et al., 2017).
Risky actions can be expressed in entrepreneurial orientation, which refers to the innovation
within existing businesses, launching of new businesses, and taking financial risks (Miller,
1983). Due to this risky behavior, the narcissistic CEO will occupy him or herself with product
market innovation, take over so-called high-risk companies, and search for profitable new entry
opportunities (Wales et al., 2013). Because the narcissistic CEO is experimenting and
innovating, chances are that the company’s performance will benefit (Miller, 1983; Wales et
al., 2013).
On the dark side, research indicates that narcissistic individuals are mainly concerned
with actions that are only beneficial for themselves (Judge, LePine & Rich, 2006). For example,
narcissists are often considered to be abrasive and insensitive to their impact on others in
interpersonal relationships (Judge et al., 2009). Despite these interpersonal problems, they
maintain a high degree of self-esteem (Emmons, 1984). To feed their self-esteem, narcissists
have a continuing need to obtain confirmation from the environment. They are convinced of
their special qualities and sincerely believe that the world looks better if they carry out their
vision. In the beginning, they are often charming, as if they also stand up for others (Sankowsky,
1995), but this charm and apparent warmth are mainly external image motivations. Due to that
charm, it often takes a long time before one can recognize the real narcissist (Sankowsky, 1995).
Narcissism is generally associated with self-esteem (Emmons, 1984), mood swings
(Emmons, 1987), and self-enhancement (John & Robins, 1994). In a related sense, narcissistic
CEOs can become unrealistic dreamers who strive to gain power and victory from the outside
world (Maccoby, 2000). They are particularly sensitive to boredom and engage in various forms
of searching for sensation (Vazire et al., 2008). Discreet or incremental actions do not suffice
since narcissistic CEOs appreciate the extreme, the grandiose, and the colorful actions
(Chatterjee & Hambrick, 2007). Hence, narcissistic CEOs believe that they can yield
extraordinary performance and have a strong sense of aggressively pursuing their goals in
business operations (Wallace & Baumeister, 2002; Maccoby, 2000).
72.3 CEO narcissism and corporate tax avoidance
Narcissistic CEOs are actively searching for risky opportunities (Braun, 2017). Because of that,
I expect that they are likely to engage in identifying tax strategies, which indicates that they
would be involved in searching for their organization’s tax avoidance tactics (Dyreng et al.,
2010; Ernst & Young, 2004). In developing tax strategies, it is generally unlikely that the CEO
can individually provide knowledge about corporate tax avoidance practices. Therefore,
deploying a tax expert, who has the knowledge concerning corporate tax avoidance and knows
the ins and outs, can be reasonable for CEOs to influence the tax activities of their company
(Olsen & Stekelberg, 2016). However, narcissistic CEOs are emotionally isolated and
exceedingly distrustful, in which it is assumed that they believe they only need their own
strength in devising corporate tax avoidance strategies because they are only convinced of their
own truth (Maccoby, 2000). That is why narcissistic CEOs are not likely to employ a tax expert
to avoid taxes because of their self-assurance and self-control (O’Reilly, Doerr & Chatman,
2017). Similarly, Ackerman, Hands, Donnellan, Hopwood, and Witt (2017) find that, by virtue
of their increased sense of boldness, narcissists are less willing to take advice from experts.
Therefore, even though corporate tax actions are legal, narcissistic CEOs feel that they are
above the law. This line of thought corresponds to the idea that CEO narcissism is related to
arrogance, self-importance, dominance, manipulativeness, thirst for power, and hostility
(Chatterjee & Hambrick, 2007).
Due to these particular characteristics, narcissistic CEOs are more inclined to pursue
rewards or desirable outcomes, while they are simultaneously weakly motivated to avoid
negative consequences for the organization (Olsen & Stekelberg, 2016). To be more specific,
it does not matter in which way they obtain a better financial position, but narcissistic CEOs
will mainly focus on the attention they receive (Campbell, Goodie & Foster, 2004). Amernic
and Craig (2010) hereby indicate that narcissistic CEOs can create a narrative about the
organization by using financial accounting to show outsiders that they perform well. “Even
when they experience failure, narcissists expect that they will do well in the future and are
willing to take on more risk than others” (Olsen & Stekelberg, 2016, p. 3). In the same vein,
this can result in big wins or big losses because narcissistic CEOs prefer extremely bold and
risky actions that draw attention (Chatterjee & Hambrick, 2007).
These actions include CEOs’ participation in devising corporate tax avoidance
strategies, which will also stimulate the self-interest and risky behavior of the narcissistic CEOs
(Campbell, Goodie & Foster, 2004). Narcissistic CEOs possess self-interest because they think
8they are special and unique (Emmons, 1984), which leads to a positive self-perception. Due to
their positive self-perception, narcissistic CEOs will overestimate their own capabilities,
making it no surprise that they take risky decisions (Campbell et al., 2004). In line with these
behaviors of narcissistic individuals, it will be more likely that there is a higher degree of
corporate tax avoidance if the CEO is narcissistic. As a result, I expect a positive relationship
between CEO narcissism and corporate tax avoidance. Therefore, I propose the following
hypothesis:
Hypothesis 1: CEO narcissism is positively associated with corporate tax avoidance.
2.4 CEO duality
The relationship between CEO narcissism and corporate tax avoidance can only be strong if the
CEO obtains a high degree of freedom to influence corporate decision-making. The
organization could possibly mitigate this effect by enabling a board of directors that can control
and monitor the narcissistic CEO (Core, Holthausen & Larcker, 1999). As a result, CG practices
in this matter are crucial because they could be expected to strengthen or weaken the effect of
CEO’s actions on organizational outcomes (Ocasio, 1999).
CG broadly refers to the mechanisms, relationships, and processes by which the
organization is governed and controlled to dictate corporate behavior (Vintila & Duca, 2013).
CG involves balancing the many interests of the stakeholders of an organization in which the
direct stakeholder the board of directors is (Core, Holthausen & Larcker, 1999). The board of
directors is responsible for the governance of their organizations. In the same vein, literature on
CG emphasizes the importance of properly performing the monitoring- and controlling role of
the board of directors. This can be defined as the effectiveness of the board (Solomon, 2007).
The effectiveness of the board has also received more attention in recent years by legislators
because there is the demand to review the governance structure and responsibilities of the
directors of the board (Solomon, 2007).
A board of directors in the United States is formed based on the so-called one-tier model:
the executive and non-executive directors are united in one group (De Moor, 2014). The one-
tier model is controlled by the chairman of the board of directors, who may or may not be the
CEO. The situation in which the same person fulfills the role of the CEO and chairman is called
CEO duality (Elsayed, 2007). CEO duality can be beneficial for the speed of the decision-
making process because the single leader gives a clear direction (De Moor, 2014; Palanissamy,
2015). In contrary, De Moor (2014) mentions that “the chairman should be an independent
9nonexecutive director” (p. 11) because a disadvantage of CEO duality is that the CEO gets too
much power and freedom in the strategic decision-making process.
The power of the CEO as chairman of the board of directors is an important issue in the
relationship between CEO narcissism and corporate tax avoidance. I expect that narcissistic
CEOs who possess a high level of power within the board of directors will have a stronger
positive influence on corporate tax avoidance. Agency theory particularly states that the
powerful functions of the CEO and chairman should be separated because otherwise CEOs have
too much freedom to influence strategic decision-making by themselves (Finkelstein &
D’aveni, 1994; De Moor, 2014). Therefore, CEO duality "signals the absence of separation of
decision management and decision control" (Fama & Jensen, 1983, p. 314). The problems that
arise when the interests of the principal (stakeholders) and their agent (management) diverge
can be reduced if the role of CEO and chairman is split because then the agency costs can be
minimized by fulfilling the role of the chairman as a monitor (Tosi, Brownlee, Silva & Katz,
2003; Palanissamy, 2015). Summarized, CEOs can abuse the extensive power to support their
self-interest, therefore agency theory discourages CEO duality (Finkelstein & D’aveni, 1994).
As CEO duality encourages CEOs to act in their self-interest, this can lead to
opportunistic behaviors (Davis et al., 1997). Opportunism is defined as self-interest seeking
with guile, which includes a blatant form such as tax avoidance (Kim, Al-Shammari, Kim &
Lee, 2009). CEOs who are already opportunistic have more room to take opportunistic
decisions due to their powerful position in the board. If the CEO is the chairperson, he or she is
in charge and can more easily conceal and control his or her activities (Palanissamy, 2015; De
Moor, 2014). Hence, I assume that this leads to a stronger relationship between CEO narcissism
and corporate tax avoidance. Therefore, the following hypothesis is derived:
Hypothesis 2: CEO duality increases the positive relationship between CEO narcissism and
corporate tax avoidance.
103. METHODOLOGY
3.1 Research design
This research is deductive in nature because the concepts and hypotheses are formulated from
earlier studies and theories. The focus of this research is quantitative, it was done by means of
performing a secondary data analysis through desk research. I used the databases Compustat,
Execucomp, BoardEx, and Factiva. In Compustat the financial, statistical, and market data from
company filings is extracted, and in Execucomp executive related information is stored. In
Compustat and Execucomp the data of the S&P 1500 companies are included, which are the
largest listed companies located in the United States. Furthermore, BoardEx contained more
specific data about biographical information of the CEO and board members. I also used
Factiva, which is one of the largest database containing global news about press releases from
public companies containing subjects such as partnerships, conferences, management moves,
corporate awards, and new products or services. Finally, I used linguistic inquiry and word
count (LIWC) as software program for the collection of first-person singular versus plural
pronouns as an indicator for CEO narcissism (see below).
3.2 Sample
The unit of analysis and the unit of observation are the CEO and organization. Because there is
only one CEO per organization, both are equal in practice. For this study, I strove to have a
sample of 100 CEOs located in three industries in the United States. I chose to investigate only
about 100 organizations because gathering complete data about CEO narcissism, corporate tax
avoidance, and CEO duality proved to be too time-consuming if the sample was larger. I
analyzed CEOs within Prepackaged Software (SIC code: 7372), Crude Petroleum & Natural
Gas (SIC code: 1311), and Pharmaceutical Preparations (SIC code: 2834) industries. The reason
for analyzing these industries is the substantial numbers of publicly-held firms. Therefore, a
high amount of data about CEOs is available within these three industries, which was important
for the data collection and the certainty that the generalizability of this research could be
enhanced. This research is specifically focused on the years 2015 and 2016 because of the
availability of the most recent data for all required variables. In 2017, the data may not have
been released yet for the organizations in the sample, hence the reason I chose to analyze 2015
and 2016. All independent, moderator and control variables are measured in 2015 and the
dependent variables in the following year (2016) to make sure that a causal relationship could
be tested.
11I started to collect my sample from Execucomp including the three SIC codes, which
initially resulted in a sample of 626 different executive ID numbers but 116 unique companies
and CEOs (N=116). After this, I matched this list with the companies located in the industries
in Compustat. Automatically, the duplicate values of the different executive ID numbers were
removed via the shift from Execucomp to Compustat, which resulted in the same sample of 116
companies. After gathering all data, I removed the observations with missing data on the key
variables, which contained a total of seven errors. Ultimately the sample consisted of 109
companies (N=109).
3.3 Measures
A clear overview of the operationalization of the variables can be found in Appendix I. Below,
I explain the measured variables in more detail.
3.3.1 Corporate tax avoidance measurement
In order to gain more insight into transparent instruments to measure corporate tax avoidance,
it is decided to investigate two indicators. In this study, the level of corporate tax avoidance is
measured via indicators developed by Wilson (2009) and Olsen and Stekelberg (2016): BTD
and UTB. All elements needed for measuring BTD and UTB are found in the Compustat
database in which the elements (used for measuring BTD and UTB) are expressed in millions.
In the main analyses, the two indicators of corporate tax avoidance are included as separate
dependent variables.
Book-tax differences
Wilson (2009) provides a proxy to measure corporate tax avoidance. He found that the
likelihood that firms engage in corporate tax avoidance is positively correlated with book-tax
differences (BTDs). The BTD is the gap between financial and taxable income and is generally
seen as a sign of the extent to which companies avoid taxes (Chyz et al., 2014). The larger this
number, the more firms are assumed to engage in corporate tax avoidance. BTD is also a proxy
for tax aggressiveness (Wilson, 2009). Chen et al. (2010) define tax aggressiveness as
“downward management of taxable income through tax planning activities” (p. 1). Tax planning
is the arrangement and structuring of corporate activities and is the legal form to reduce
corporate taxes (Lisowsky et al., 2013). Therefore, corporate tax avoidance is linked with BTD
because companies with large positive and negative BTDs are more likely to involve in tax
planning activities and commonly have aggressive financial statement reporting (Blackbourne
& Blouin, 2016). Besides, BTD is associated with earnings management due to the complex
12tax avoidance transactions (Hanlon, 2005). The CEO can influence financial outcomes which
lead to higher BTDs (Gebhart, 2017). BTD can be calculated via the formula designed by
Blackbourne and Blouin (2016):
PI - (TXFED + TXFO) / 0.35
In which PI is the pretax income, TXFED the total federal tax expense, and TXFO the foreign
tax expense. The corporate statutory tax rate is 35 percent in 2016 in the United States for
companies, therefore this is also included in the formula of BTD (Blackburne & Blouin, 2016).
Uncertain/ unrecognized tax benefits
An alternative measure for corporate tax avoidance is provided by Olsen and Stekelberg (2016):
the uncertain or unrecognized tax benefits (UTBs). UTBs “reduce the firm´s tax expense for
financial accounting purposes or create a liability” (De Waegenaere, Sansing & Wielhouwer,
2010, p. 4). In accordance, Olsen and Stekelberg (2016) argue that UTB is the difference
between a company’s expected or taken tax position on the company’s income tax return. In
addition, UTB recognizes the benefit on the annual accounts. This measurement also applies
that corporate tax avoidance is associated with an increase in UTBs (Olsen & Stekelberg, 2016).
Lisowsky et al. (2013) measure UTBs as the formula:
TXTUBEND / AT
In which TXTUBEND is the unrecognized tax benefits and AT the total assets of the firm.
3.3.2 CEO narcissism measurement
CEO narcissism could be measured by the narcissistic personality inventory (NPI) survey
developed by Raskin and Hall (1979) and is in further studies used to capture narcissism as a
personality trait (Cain, Pincus & Ansell, 2008). NPI is the most widely used measure of
narcissism in social psychological research which measured in 40-items the narcissism
construct. However, since narcissism is a sensitive subject, interviews and questionnaires were
not possible for this study. Moreover, the NPI was for this study not feasible because of the
large sample, making it too time-consuming due to the difficulty of approaching the large
number of CEOs. Therefore, this study used an unobtrusive measure to find indirect ways to
obtain all necessary information for CEO narcissism. The level of CEO narcissism is measured
by five indicators developed by Chatterjee and Hambrick (2007). The five indicators are as
follows: CEO prominence on photographs, CEO prominence in press releases, CEO use of first-
person singular pronouns, CEO relative cash pay, and CEO relative non-cash pay. These five
13indicators as complete measurement or only a set of indicators have been used and validated
several times by different researchers in different contexts, which ensures that this is an
appropriate measurement to use (Kuang, Mohan & Qin, 2015; Gerstner, König, Enders &
Hambrick, 2013; Asay, Libby & Rennekamp, 2018; Buyl, Boone & Wade, 2017; Resick,
Whitman, Weingarden & Hiller, 2009). As a result, in this study, CEO narcissism is measured
on the basis of merging the standardized indicators, divided by the number of items (five).
CEO prominence on photographs
Data about the prominence of the CEO’s photograph is collected by gathering annual reports
of the companies (Chatterjee & Hambrick, 2007). The annual reports do not only include
financial data but also how the CEOs portrayed themselves as the leader of the company. Since
narcissists have a high self-importance and a strong desire for recognition, this could be linked
with the prominence of their photograph in the annual report (Olsen, Dworkis & Young, 2013).
I obtained annual reports and Form 10-K1 from http://www.annualreports.com and the company
websites. The more prominent the photograph, the more narcissistic the CEO is because then
he or she felt more important (Chatterjee & Hambrick, 2007). Chatterjee and Hambrick (2007)
rated this indicator as follows:
4 points if the CEO is alone on the photo and occupied more than half a page;
3 points if the CEO is alone on the photo and occupied less than half a page;
2 points if the CEO is on the photo with one or more fellow executives;
1 point if the CEO is not on the photo.2
CEO prominence in press releases
The prominence of the CEO in press releases is measured by gathering press releases from
Factiva (Chatterjee & Hambrick, 2007). For each CEO and associated organization, press
releases are retrieved between 1 January and 31 December 2015. I included subjects such as
corporate or industrial news and political/ general news. I made the decision to exclude the
topics on economic news, commodity/ financial market news, earnings, and sports from the
press releases because there were too many results. In addition, the results would be biased if I
1
The companies that do not have their annual report public and only reported a Form 10-K, without a photo,
received a score of 1.
2
If there are several photos for example a photo of the CEO alone and the CEO with multiple executives, then this
received a score of 3 because if the CEO is displayed alone on the photograph, this will count for more.
14include economic press releases because these releases contain many tables that were also
adding to the number of words, making the resultant data inconsistent. Nevertheless, the number
of words were too varied because the lowest score was 129 and the highest score was 147768
words. This results in the decision to change the total number of words of all releases into only
the amount of press releases. The number of press releases per company fluctuated from 1 to
77 press releases per company. Since the CEO can control the press releases, he or she would
show who is leading the company in order to obtain admiration (Chatterjee & Hambrick, 2007).
Therefore, the more press releases and the more the CEO is mentioned in these press releases,
the more narcissistic the CEO is. The formula for CEO prominence in press releases is:
The times the CEO is mentioned by name in company’s press releases / the total amount of
press releases
CEO use of first-person singular pronouns
An indicator for narcissism is the use of first-person singular pronouns when talking about the
organization because this might reflect self-interest (Carey et al., 2015). The use of first-person
singular pronouns of the CEO is measured by using the letter to shareholders in the annual
report. The annual report does not only include financial data, but also a letter from the CEO to
shareholders. The letter to shareholder provides “a personal accountability narrative of
corporate CEOs” (Craig & Amernic, 2011, p. 566). In case the CEO is narcissistic, he or she
has a strong need for attention and admiration, which is measured as the use of first-person
singular versus first person plural pronouns in the letter to shareholders3 (Olsen et al., 2013;
Chatterjee & Hambrick, 2007). The higher the frequency of using the first-person singular
pronoun, the more narcissistic the CEO was. LIWC is used to count these words by means of
the formula (Chatterjee & Hambrick, 2007):
The number of first-person singular pronouns (I/ me/ my/ mine) / the sum of the first-person
singular pronouns and first-person plural pronouns (we/ us/ our/ ours)
CEO relative cash pay and non-cash pay
CEO relative cash pay reflects the compensation of the CEO compared to the second highest
paid executive in the company. If the narcissistic CEO believes that he or she is more valuable,
3
Not all companies have published their annual report, which means that the letter to shareholders is missing in
some cases. For these companies, CEO narcissism is measured on the basis of four indicators, so this indicator
will be not taken into account for these companies.
15then compensation will be more unequal since the CEO can influence their own payment
(Chatterjee & Hambrick, 2007). In accordance, O’Reilly, Doerr, Caldwell, and Chatman (2014)
argue that a “CEO often has a significant ability to influence how his or her compensation is
set” (p. 221). Furthermore, they find that narcissistic CEOs have a greater difference between
their own cash and non-cash compensation in comparison with the second highest paid
executive in the firm (O’Reilly et al., 2014). Data on relative cash pay and non-cash pay was
collected using the following formulas of Chatterjee & Hambrick (2007, p. 364):
“CEO’s cash compensation (salary and bonus) / that of the second highest paid
executive in the firm”
“CEO’s non-cash compensation (deferred income, stock grants, and stock options) /
that of the second highest paid executive in the firm”
The relative cash and non-cash compensation of the CEO and the second highest paid executive
in the firm are retrieved from the Execucomp database and both indicators are expressed in
millions. The higher the amount of compensation in cash or non-cash, the higher the degree of
CEO narcissism.
3.3.3 CEO duality measurement
CEO duality implies that the CEO also acts as chairman of the board of directors. It is a binary
variable, which is 1 if the CEO is also the chairperson of the board of directors and 0 if the CEO
is not the chairperson (Olsen & Stekelberg, 2016; Buyl et al., 2017). CEO duality is found in
the BoardEx database, which contains biographical information of the CEO and board
members. However, there was a lack of information due to missing variables. Therefore, I
decided to manually obtain information from the firm’s board of directors via the companies’
website.
3.3.4 Control variables measurements
In line with Strater’s (2017) study on tax avoidance, the following control variables are
included: firm size (TA), firm performance (ROA) and firm growth prospects as a market-to-
book ratio (MTB). These control variables are retrieved from the Compustat database and are
expressed in millions. At last, industry (SIC) is included in this study as a control variable,
which is also retrieved from Compustat.
Firstly, firm size is measured by the total assets (TA) of the firm, whereby the more
assets the firm has, the greater tax planning can be developed due to their greater resources
16(Strater, 2017). Greater tax planning will lead to a higher corporate tax avoidance. Secondly,
companies with a high level of return on assets (ROA) are expected to be actively involved in
tax avoidance (Kim & Im, 2017). Companies with a high ROA have been found to be more
proactive in avoiding tax in order to decrease cash outflow (Strater, 2016). Thirdly, MTB ratio
indicates a positive relationship with corporate tax avoidance, because companies with high
growth rates are also motivated to reduce cash outflows with the aim of increasing their
profitability (Kim & Im, 2017).
Industry (SIC) is included in this study because it may be that some industries are more
or less sensitive to avoid corporate taxes and that the average level of avoiding corporate taxes
is higher or lower per industry. This can influence for example the practices for cash payments,
which can differ a lot across the three industries (Porac, Wade & Pollock, 1999). Therefore, I
will check for any systematic differences, because these differences might influence the results.
The industry SIC codes are retrieved from Compustat and in order to take the three industries
(SIC) as a nominal variable in further analysis, dummy variables are created. The SIC codes
1311 and 2834 are transformed into new dummies of 1 if it is present and 0 if it is absent.
Therefore, SIC code 7372 is present if it has both a score of 0.
174. RESULTS
4.1 Preliminary data analyses
Before running the data analyses, some preliminary data analyses were conducted. First, the
data was checked for errors with the aim of making the data as clean as possible. Subsequently,
I checked whether the variables were normally distributed and if they were not, they were
transformed into new logarithmically transformed variables. Finally, factor analyses were
conducted for the construct of CEO narcissism. By means of three different forms of factor
analyses, I investigated to what extent the five indicators jointly represent one construct
(narcissism).
4.1.1 Normal distribution
The normal distribution was derived on the basis of the skewness and kurtosis level. Appendix
II shows the degree of skewness and kurtosis. If the skewness is less than -1 or greater than 1
and the kurtosis is less than -3 or greater than 3, the distribution is highly skewed (Pallant, 2013;
George & Mallery, 2010). In addition, to visualize the distributions, I have conducted
histograms, which can be found in Appendix III. BTD, ROA and MTB should be skewed on
the basis of previously mentioned scores, however these variables are normally divided in the
visualization. Therefore, it is decided to determine the skewness based on the visualizations.
The variables which showed a skewed distribution were transformed into natural logarithms
(Warner, 2012), which were UTB, CEO releases, cash pay, non-cash pay, and total assets. After
this, the histograms were re-created with the new logarithm variables. The new histograms were
compared with the old histograms and if the graph was more normally distributed, these
logarithm variables were also included in the entire further analysis. Moreover, the degree of
skewness and kurtosis were compared with the original and transformed variables with the
result that the transformed variables were more normally distributed (Appendix III).
4.1.2 Factor analyses
The factor analyses were conducted to find out the underlying patterns and interrelationships
between the five indicators of CEO narcissism. Table 1 shows the outcomes of the three
different factor analyses. First, a factor analysis was performed with no rotation. The factor
analysis with no rotation shows that all indicators load on the first dimension with the exception
of CEO photo which loads on the second dimension. Remarkably, the indicator of press releases
loads negatively in comparison with the other positively loaded indicators on component 1. Due
to the striking results, a Varimax rotation has been performed. The factor analysis with Varimax
shows that CEO photo, CEO releases, and CEO singular pronouns load on component 2, while
18You can also read
