Asia-Pacific Journal of Accounting & Economics

ISSN: 1608-1625 (Print) 2164-2257 (Online) Journal homepage: https://www.tandfonline.com/loi/raae20

Financial expertise and corporate tax avoidance

Huichi Huang & Wei Zhang

To cite this article: Huichi Huang & Wei Zhang (2020) Financial expertise and corporate
tax avoidance, Asia-Pacific Journal of Accounting & Economics, 27:3, 312-326, DOI:
10.1080/16081625.2019.1566008

To link to this article: https://doi.org/10.1080/16081625.2019.1566008

Published online: 17 Jan 2019.

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ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS
2020, VOL. 27, NO. 3, 312–326
https://doi.org/10.1080/16081625.2019.1566008

Financial expertise and corporate tax avoidance

Huichi Huang and Wei Zhang
College of Business, North Dakota State University, Fargo, ND, USA

ABSTRACT ARTICLE HISTORY

This study examines financial expert CEOs as one of the determinants of Received 23 September 2018
corporate tax avoidance. We conjecture that financial sophistication Accepted 16 November 2018
motivates CEOs to approach tax avoidance as an investment. We inves- KEYWORDS
tigate the relationship between financial expert CEOs and tax avoidance Tax avoidance; financial
both at the conditional mean and across tax avoidance distribution. expertise; CEO employment
Consistent with our conjecture, we find that financial expert CEOs are history; CEOs characteristics
associated with a more aggressive tax avoidance policy. Further, our
results indicate that the impact of financial expert CEOs results from
a careful analysis of cost and benefit.

1. Introduction
This paper examines whether corporate tax avoidance is influenced by financial expertise of
CEOs. Armstrong, Blouin, and Jagolinzer (2015) suggest that tax avoidance can be viewed as
one of many alternative risky investment opportunities. As such, it has two opposing effects on
the value of the firm. Tax avoidance may result on the one hand increases in equity value or on
the other hand increases in cost of capital. Dyreng, Hanlon, and Maydew (2010) find that the
effects of top executives appear to be an important determinant in firms’ tax avoidance. We
extend this strand of research by studying the impact of CEOs with financial background on tax
avoidance.
There are several reasons why one may anticipate a relationship between financial backgrounds
of CEOs and tax avoidance. First, Custodio and Metzger (2014) find that CEOs with financial
background are active managers who hold less cash, more debt, and engage in more share
repurchase. To the extent that tax avoidance can be viewed as an alternative investment oppor-
tunity, one would expect that CEO’s with financial background manage tax avoidance actively
based on the tradeoff of risk and benefits. Second, Gallemore and Labro (2015) find that firms’
ability to avoid taxes is affected by the quality of their internal information environment and Hui
and Matsunaga (2015) find evidence that CEOs with financial expertise result in better disclosure
practice. It is possible that CEOs with financial expertise could influence tax policy by improving
a firm’s internal information environment. Finally, early managerial literature (see, e.g., Hambrick
and Mason 1984) suggests that the background and experience of CEO’s have substantial
influence on their managerial decisions. More recent finance and accounting literature suggests
that industrial experience and background matter in corporate performance (Custodio and
Metzger 2013; Law and Mills 2017; Kalekar and Khan 2016).
Alternatively, a CEO with financial expertise may have more access of capital and therefore
may not consider tax planning as the priority among various investment opportunities. Custodio

CONTACT Huichi Huang [email protected] College of Business, North Dakota State University, 811 2nd Ave. N.,
Fargo, ND 58108-6050, USA
This paper was initiated when Huichi Huang was at Oregon State University. All errors remain our responsibility.
© 2019 City University of Hong Kong and National Taiwan University
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 313

and Metzger (2014) finds that financial expertise of CEOs have acquired the necessary skills to
communicate with capital markets through better ability to reduce information asymmetry. One
benefit associated with these skills and abilities is a better access to capital. One may expect to see
no influence of financial expertise CEOs on tax avoidance if raising cash by tax avoidance is not
the priority need for the company. We thus test this question empirically.
We define a financial expert as a CEO who has past experience either in a finance-related role
or in a large auditing firm and examine the relationship between CEOs with finance expertise and
tax avoidance as measured by the long-term cash effective tax rate. We find a positive relationship
between CEOs with financial expertise and tax avoidance. Our results indicate that there is
a positive relationship between CEO’s financial expertise and tax avoidance. We also perform
quantile regression to determine whether the relation between financial expertise and tax avoid-
ance varies across the tax avoidance distribution. We find that the relationship is stronger for
a lower level of tax avoidance, which suggests that CEO’s with financial expertise pursue tax
avoidance more aggressively when the risk associated with tax avoidance is lower.
We also examine how corporate governance measures influence the relationship between CEOs
with financial expertise and tax avoidance. Specifically, we examine how institutional ownership
and managerial entrenchment interact with the impact of financial expertise on tax avoidance. We
find that the interaction of financial expertise with low (high) level of institutional ownership has
positive (no) relationship with tax avoidance, which suggests that low (high) level of institutional
ownership, which can be considered as a measure of external monitoring, motivates (mitigates)
the impact of CEOs with financial expertise on tax avoidance. This is consistent with the intuition
that CEOs with financial expertise pursue tax avoidance more aggressively when external mon-
itoring is low. We also find that the interaction of financial expertise with low (high) level of
managerial entrenchment has positive (no) relationship with tax avoidance, which suggests that
low (high) level of managerial entrenchment, which is a measure related to conservatism and risk
aversion, motivates (mitigates) the impact of CEOs with financial expertise on tax avoidance. This
is consistent with the intuition that CEOs with financial expertise who are less conservative and
risk-averse pursue tax avoidance more aggressively. Results from quantile regression indicate that
the motivating effect of low level of institutional ownership and managerial entrenchment is most
pronounce at a low level of tax avoidance where the risk associated with tax avoidance is low.
The remainder of the paper proceeds as follows. Section 2 reviews the related literature and
develops the hypotheses. Section 3 discusses data, sample selection, and research design. Section 4
presents the results; Sections 5 and 6 reports additional analysis for robustness checks. Section 7
concludes.

2. Prior literature and hypotheses development

2.1. Prior literature
The relation between the background of managers and tax avoidance involves several streams of
literature. The first one deals with the role of managers in corporate performance. Starting with
Hambrick and Mason (1984), the so-called ‘upper echelon theory’ argues that top managers
make a significant contribution to performance. This argument has been supported by empirical
evidence that CEOs have heterogeneity of management style which matters significantly in
corporate performance. The impact of CEOs’ education, background, experience personal
characteristics, or personal traits have been examined in the literature (Malmendier and Tate
2005; Kaplan, Klebanov, and Soren 2012; Malmendier and Tate 2008, Custodio and Metzger
2013; Law and Mills 2017).
The second stream literature examines the determinant of tax avoidance with focus on the
impact of managers on tax avoidance. Dyrang et al. (2010) examine a data set that tracks the
movement of 908 executives across firms over time and find that individual executives play
314 H. HUANG AND W. ZHANG

a significant role in determining the level of tax avoidance. Law and Mills (2017) find that
managers with military experience pursue less tax avoidance and pay $1–2 millions more in
corporate taxes per firm-year. Gallemore and Labro (2015) find that firms’ ability to avoid taxes is
affected by the quality of their internal information environment.
The third stream of related literature explores the influence of CEO’s financial background and
experience in corporate policy. Custodio and Metzger (2014) find that CEOs with financial
background are active managers who hold less cash, more debt, and engage in more share
repurchase. Hui and Matsunaga (2015) find evidence that CEOs with financial expertise result
in better disclosure practice. Kalekar and Khan (2016) find that firms that have a financial expert
CEO pay lower audit fees.
The fourth stream of literature examines how corporate governance influence managerial
behavior and tax avoidance. Desai and Dharmapala (2006) argue that managers in well-
governed firms are more likely to engage in tax avoidance because internal control will prevent
managers from extracting rents generated by tax avoidance. Armstrong, Blouin, and Jagolinzer
(2015) take the traditional ‘agency-theoretic’ view and argue that tax avoidance is one of many
risky investment opportunities available to managers who would in turn approach this opportu-
nity based on their own cost and benefit analysis.

2.2. Research hypotheses

We take the view proposed by Armstrong, Blouin, and Jagolinzer (2015) that tax avoidance can be
viewed as one of many alternative risky investment opportunities. We conjecture that CEOs with
financial expertise are more sophisticated than others when it comes to analyzing the cost and
benefits of tax avoidance. On the one hand, CEOs with financial expertise may pursue more
aggressive tax avoidance policy and the level of aggressiveness is highest when the cost associated
with tax avoidance is low. On the other hand, financial background of CEOs may pursue their
investment opportunities other than tax planning activities, as they are more skilled in communicat-
ing with the finance communities (e.g. financial analysts etc.) and have better network to access more
capital through other channels. As such, whether CEOs with financial expertise is associated with
more aggressive tax avoidance policy is an empirical question. We thus examine the relationship
between financial expert CEOs and tax avoidance, expressed in the following null hypothesis:

H1: CEOs with financial expertise do not pursue more aggressive tax avoidance policy.

Prior studies suggest that corporate governance attributes may affect a firm’s tax avoidance
behavior (Minnick and Noga 2010; Armstrong, Blouin, and Jagolinzer 2015). We further examine
whether certain governance mechanisms would strengthen or attenuate the relationship between
financial expert CEOs and tax avoidance. We consider institutional ownership as outside mon-
itoring mechanism, and CEO power and risk appetite as the inside governance mechanism.
Our second hypothesis is that CEOs with financial expertise will pursue more aggressive tax
avoidance policy when monitoring mechanism is weak and when managers are less entrenched
and less risk-averse. We express this in the following null form:

H2: The relationship between CEOs with financial expertise do not change when external or
internal monitoring mechanisms are stronger.

3. Data, sample selection and research design

Our sample covers Standard and Poor (S&P) 1500 firms from the year 1993 to 2013 and excludes
firms in the financial industry (SIC code 6000–6999) and utilities industry (SIC code 4000–4999)
because specific regulations affect their tax avoidance strategy. We first identify CEO’s past work
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 315

Table 1. Variable definitions.

Variable Definition
CETR The sum of cash taxes paid over the five-year window ending in year t, scaled by the sum of pre-tax income
adjusted for special items in the same period.
CETR1yr Cash taxes paid in year t scaled by the sum of pre-tax income adjusted for special items in year t.
FINEXP CEOs with prior financial-related work experience.
SIZE Log of total assets at year t.
PPE Property, plant and equipment at year t, divided by beginning-of-year total assets.
dPPE Changes in property, plant and equipment at year t, divided by beginning-of-year total assets.
LEV Long-term debt at year t, divided by beginning-of-year total assets.
INTAN Intangible assets at year t, divided by beginning-of-year total assets.
RND Research and development expense at year t, divided by beginning-of-year total assets.
dNOL Indicator variable equal to one if net operating loss carryforward at year t is positive and zero otherwise.
d_NOL Change in net operating loss carryforward at year t, divided by beginning-of-year total assets.
FI Pre-tax foreign income at year t, divided by beginning-of-year total assets.
dFI Indicator variable equal to one if pre-tax foreign income is non-zero and zero otherwise.
ROA Operating income before depreciation, divided by beginning-of-year total assets.
MTB Market value of equity scaled by book value of common equity.
logAGE Log of number of years since the first year of data availability on COMPUSTAT.
Extra Extraordinary items at year t, divided by beginning-of-year total assets.
Salesgrw Sales growth of last year, which equals sales of year t/sales of year t-1.
CEOage Age of the CEO.
CEOtenure Number of years the CEO has served the company.
MASCORE Managerial ability scores developed in Demerjian, Lev, and McVay (2012).

experience from BoardEx database and select CEO who was in a finance-related role (Accountant,
CFO, Treasurer, or VP of Finance), or in a large auditing firm (Pricewaterhouse, Deloitte, Ernst &
Young, KPMG, Arthur Andersen, Coopers, PeatMarwick, and ToucheRoss). We obtain account-
ing data from Compustat and CRSP. All variable definitions are reported in Table 1.
Halon and Heitzman (2010) suggest that researchers should consider from a wide range of
proxies that are more appropriate for the research question of interest. We select the long-run
cash effective tax rate (CETR) as the tax avoidance proxy in our primary analysis, as this measure
reflects permanent and temporary tax deferral strategies and is not affected by changes in tax
accounting accruals.1 We choose the long-run measure of tax avoidance as it avoids year-to-year
volatility in annual effective rates and the mismatch of cash taxes and earnings. According to
Dyreng, Hanlon, and Maydew (2008), the long-run measures are superior predictors to short-run
measures, suggesting that one-year cash ETRs can be a noisy proxy for long-run tax planning
strategy.
To investigate whether CEOs with prior financial-related work experience affects their tax
policy decisions, we estimate the following regression model for the sample firms:
P P
CETRi;t ¼ α0 þ α1 FINEXPi;t þ K αk Controlsi;k;t þ j αj Industry Fixed Effectsi
X
þ α Year Fixed Effectst þ εi;t ;
j j
(1)

where CETR is measured as the sum of cash taxes paid over a five-year period ending in year t,
scaled by the sum of pre-tax income (adjusted for special items) over the same period. Following
the prior literature, we delete observations if the denominator is negative while calculating CETR,
and we winsorize CETR at zero and one.2 We define the primary explanatory variable FINEXP as
CEOs with prior financial-related work experience. We expect a1 to be negative if financial expert
CEOs tend to adopt tax avoidance strategy.
We include several control variables that may be associated with tax avoidance outcomes in
prior literature (Dyreng, Hanlon, and Maydew 2008; Phillips 2003; Rego and Wilson 2012;
Gallemore and Labro 2015). We include firm size (SIZE), two measures of property, plant, and
equipment (PPE and ΔPPE), leverage (LEV), intangibles (INTAN), R&D expense (RND), two
measures of net operating losses, NOL dummy and ΔNOL (dNOL and d_NOL), two measures of
316 H. HUANG AND W. ZHANG

foreign operations, foreign income and foreign income dummy (FI and dFI), return on assets
(ROA), market-to-book ratio (MTB), firm age (lagAGE), extraordinary items (Extra), and sales
growth (Salesgrw).

4. Empirical results
4.1. Descriptive statistics
Panel A of Table 2 reports the descriptive statistics of our regression variables for the full sample.
About 18% of our sample firms have CEOs with financial background. A typical CEO is 55 years
old with 8 years of experience, which is similar to results reported by Custodio and Metzger
(2014). The distribution of CETR and control variables for firms without financial expert CEO’s
are consistent with those reported in prior studies. The mean CETR value for our sample for the
period of 1993–2013 is around 24%. In comparison, the mean CETR value in Law and Mills
(2017) between 1992 and 2011 is 26.5%; the mean CETR value in Dyreng, Hanlon, and Maydew
(2010) for the period of 1995–2004 is 29.1%. The distribution of our control variables is also
broadly consistent with prior literature. For example, the mean values of size, leverage, R&D, and
sales growth in our sample are 7.8, 0.18, 0.04, and 0.11, respectively. In comparison, the mean
value of the same variables reported in Gallemore and Labro (2015) are 6.13, 0.18, 0.03, and 0.16,
respectively. We note that the mean and median of cash effective rax rate value for firms without
financial expert CEOs is lower and the difference and is significant at 1%, which appears to
suggest that CETR (tax avoidance) is lower (higher) when firms are managed by CEOs with
financial expertise.
Panel B of Table 2 presents Pearson correlations. As expected, there is a significantly negative
correlation between financial expertise and long-run cash effective tax rate. The univariate results
generally suggest that financial expertise is negatively correlated to cash effective tax rate and firms
with financial expert CEOs have a lower cash effective tax rate.

4.2. Impact of financial expertise on tax avoidance

To examine the relationship between tax avoidance and financial expertise of the CEO, we run
panel regression with year and industry fixed effect on the determinants of five-year cash effective
tax rate in which the primary independent variable is a financial expert dummy. Other control
variables including leverage, R&D expense, and foreign income. Panel A of Table 3 shows the
results on the impact of financial expert CEOs on the five-year effective tax rate. A firm with
financial expert CEO pays an economically meaningful 1.7% less taxes than a firm with non-
financial expert CEO. The coefficient of the financial expert CEO dummy is statistically significant
at 1% level and supports our main hypothesis that CEOs with financial expertise will pursue more
aggressive tax avoidance policy. In general, the coefficients on many control variables are
statistically significant and are in line with those reported in prior research. For example, the
coefficients on leverage, R&D, and NOL, are all negative and significant, consistent with interest
expense, depreciation and prior losses decreasing cash effective tax rates.
Serfling (2014) documents a negative relationship between CEO age and risk-taking behavior
and shows that older CEOs invest less in research and development, maintain lower operating
leverage, and manage firms with more diversified operations which lower the probability of
operating losses. Columns 3 of Panel A, Table 3 shows the results on the impact of financial
expert CEOs on five-year effective tax rate with two additional dependent variables CEO age and
tenure. The coefficients on CEO age and CEO tenure are insignificant, and the coefficient on
financial expert dummy remains significant at 5% level. Our results provide strong evidence that
finance expert CEO’s pursue a more aggressive tax avoidance policy, resulting in a significantly
lower cash effective tax rate, even after we control for CEOs’ age and tenure.
Table 2. Panel A: descriptive statistics. Panel B: correlation matrix.
Firms without Financial Expert CEOs Firms with Financial Expert CEOs
Difference Difference
Obs. Mean Median Std. Obs. Mean Median Std. in means in medians
Panel A: Descriptive Statistics
CETR 6,807 0.247 0.251 0.122 1,458 0.231 0.233 0.111 0.016*** 0.018***
SIZE 6,807 7.793 7.674 1.422 1,458 7.821 7.657 1.572 −0.028 0.016
PPE 6,807 0.523 0.437 0.351 1,458 0.551 0.431 0.389 −0.028*** 0.006
dPPE 6,807 0.041 0.026 0.079 1,458 0.042 0.024 0.079 −0.001 0.002
LEV 6,807 0.187 0.165 0.174 1,458 0.196 0.173 0.179 −0.010** −0.008**
INTAN 6,807 0.219 0.167 0.219 1,458 0.230 0.181 0.225 −0.011* −0.014**
RND 6,807 0.043 0.019 0.057 1,458 0.034 0.010 0.051 0.009*** 0.009***
dNOL 6,807 0.003 0.000 0.039 1,458 0.004 0.000 0.039 −0.001 0.000
d_NOL 6,807 0.449 0.000 0.497 1,458 0.469 0.000 0.499 −0.020 0.000
FI 6,807 0.039 0.027 0.046 1,458 0.034 0.021 0.044 0.006*** 0.006***
dFI 6,807 0.987 1.000 0.114 1,458 0.966 1.000 0.180 0.020*** 0.000***
ROA 6,807 0.181 0.163 0.092 1,458 0.166 0.151 0.084 0.015*** 0.012***
MTB 6,807 3.460 2.629 3.726 1,458 3.198 2.484 3.299 0.262** 0.146***
logAGE 6,807 3.022 3.178 0.590 1,458 3.090 3.258 0.550 −0.068*** −0.080***
Extra 6,807 0.000 0.000 0.006 1,458 0.000 0.000 0.005 0.000 0.000*
Salesgrw 6,807 0.113 0.082 0.200 1,458 0.093 0.074 0.179 0.020*** 0.009***
CEOage 6,318 56.273 56.000 7.069 1,375 55.457 56.000 6.759 0.815*** 0.000***
CEOtenure 4,694 7.737 5.753 7.092 1,034 8.062 5.505 7.734 −0.325 0.248
Inst_Own 6,807 0.785 0.802 0.185 1,458 0.807 0.819 0.165 −0.022*** −0.017***
Eindex 6,807 2.751 3.000 1.629 1,458 2.879 3.000 1.650 −0.129*** 0.000***
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Panel B: Correlation Matrix
CETR 1
FINEXP 2 −0.052
SIZE 3 −0.022 0.007
PPE 4 0.034 0.030 0.103
dPPE 5 −0.046 0.004 0.006 0.475
LEV 6 −0.010 0.022 0.194 0.211 0.226
INTAN 7 −0.024 0.019 0.109 −0.318 0.023 0.349
RND 8 −0.242 −0.059 −0.166 −0.219 0.024 −0.226 −0.048
dNOL 9 0.030 0.005 0.000 0.011 0.055 0.057 0.094 0.007
d_NOL 10 −0.114 0.015 0.023 −0.086 −0.063 0.052 0.123 0.011 0.147
FI 11 −0.087 −0.048 0.188 −0.011 0.098 −0.079 −0.055 0.189 −0.016 −0.007
dFI 12 0.006 −0.060 0.050 −0.101 −0.050 0.001 0.071 0.068 0.017 0.055 0.110
ROA 13 0.034 −0.063 −0.023 0.201 0.382 0.008 −0.058 0.187 −0.018 −0.154 0.392 −0.002
ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS

MTB 14 −0.028 −0.032 0.075 −0.033 0.029 −0.025 −0.046 0.168 0.001 −0.071 0.197 0.019 0.319
logAGE 15 0.106 0.045 0.381 0.099 −0.126 0.048 0.003 −0.228 −0.023 0.012 0.052 −0.003 −0.127 −0.035
Extra 16 0.051 0.007 0.040 −0.001 −0.052 −0.015 −0.020 −0.009 −0.023 −0.006 −0.001 −0.013 −0.020 0.005 0.017
Salesgrw 17 −0.128 −0.039 −0.060 0.038 0.445 0.109 0.149 0.181 0.018 0.004 0.173 −0.001 0.395 0.103 −0.198 −0.048
317

CEOage 18 0.076 −0.045 0.088 0.052 −0.014 0.032 0.017 −0.160 0.006 −0.009 −0.040 0.007 −0.026 −0.024 0.188 −0.013 −0.053
CEOtenure 19 −0.005 0.017 −0.088 −0.089 0.038 −0.024 −0.021 0.032 0.014 −0.015 0.006 −0.013 0.030 0.018 −0.003 −0.005 0.065 0.414
This table reports Pearson correlation for the period 1993–2013. The correlation coefficient is reported in each cell. Numbers reported in bold and italics represent strong (p < 0.01) or weak
(p < 0.05 or p < 0.1) levels of significance, respectively. All variables are defined in Appendix A.
318 H. HUANG AND W. ZHANG

Table 3. The relationship between financial experts and tax avoidance.

Dependent Variable: CETR
(1) (2) (3)
Coefficients Coefficients Coefficients
(t-statistics) (t-statistics) (t-statistics)
Panel A
FINEXP −0.014** −0.017*** −0.015**
(−2.16) (−2.86) (−2.09)
SIZE −0.006*** −0.006**
(−2.92) (−2.40)
PPE −0.018 −0.024*
(−1.62) (−1.76)
dPPE −0.023 −0.027
(−0.84) (−0.79)
LEV −0.051*** −0.052***
(−3.25) (−2.84)
INTAN 0.040*** 0.035**
(3.07) (2.26)
RND −0.422*** −0.350***
(−7.43) (−5.55)
dNOL 0.156*** 0.147***
(3.65) (2.99)
d_NOL −0.010** −0.009
(−2.10) (−1.63)
FI −0.090 −0.112
(−1.53) (−1.77)
dFI 0.038* 0.022
(1.74) (0.89)
ROA 0.147*** 0.138***
(4.52) (3.62)
MTB −0.001* −0.001**
(−1.96) (−2.14)
logAGE 0.024*** 0.027***
(4.46) (4.15)
Extra 0.722** 0.783**
(2.56) (2.49)
Salesgrw −0.068*** −0.070***
(−7.69) (−6.41)
CEOage 0.001
(1.34)
CEOtenure 0.000
(−0.81)
Year fixed effect Yes Yes Yes
Industry fixed effect Yes Yes Yes
Adj. R-squared 0.134 0.198 0.210
No. of observations 8,265 8,265 5,561
Dependent Variable: CETR
Quantile Coefficients t statistics
Panel B: Quantile Regressions – coefficients on FINEXP
0.05 −0.004 (−0.81)
0.10 −0.006 (−1.57)
0.15 −0.008* (−1.94)
0.20 −0.007* (−1.74)
0.25 −0.011*** (−2.57)
0.30 −0.014*** (−3.23)
0.35 −0.012*** (−2.73)
0.40 −0.010*** (−2.54)
0.45 −0.009*** (−2.60)
0.50 −0.008*** (−2.95)
0.55 −0.009*** (−2.90)
0.60 −0.009*** (−2.95)
0.65 −0.008*** (−3.23)
(Continued)
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 319

Table 3. (Continued).
Dependent Variable: CETR
Quantile Coefficients t statistics
0.70 −0.009*** (−3.57)
0.75 −0.011*** (−3.76)
0.80 −0.014*** (−4.19)
0.85 −0.016*** (−3.84)
0.90 −0.018*** (−3.94)
0.95 −0.022*** (−4.42)
This table reports the relation between financial experts CEOs and cash effect tax rates. The sample
covers observations for the years 1993 to 2013. Regression models in Panel B include untabulated
control variables and year and industry fixed effects. Variable definitions are shown in Appendix
A. The t statistics shown next to the estimated coefficients are based on standard errors clustered
by firm. ***, **, and * indicate two-tailed statistical significance at levels 1%, 5%, and 10%,
respectively.

Armstrong, Blouin, and Jagolinzer (2015) note that ‘Quantile regression allows us to draw
more complete inferences beyond those that can be drawn from traditional ordinary least squares
(OLS) regressions, which only describe the relationship between independent variables and the
conditional mean of the dependent variable of interest.’ Huseynov, Sardarli, and Zhang (2017)
find that the impact of index addition on tax avoidance is asymmetric on lower and higher level of
tax avoidance. These suggest that the determinants of tax avoidance may exhibit asymmetric
behaviors across different quantiles of cash effective tax rates. We may observe a pronounced
effect of financial expert CEOs on tax avoidance in certain quartiles.
We next perform quantile regressions to determine whether the relation between financial
expertise and tax avoidance varies across the tax avoidance distribution. As discussed in Section 2,
we expect that CEOs with financial expertise may be more actively engaged in tax planning when
the level of tax avoidance departs from the average. When cash effective rates are high, the
opportunity to generate cash savings from tax planning is more likely than the cases when cash
effective tax rates are low. If so, we would expect to observe a more pronounced relationship
between financial expertise CEOs and tax avoidance when CETR is at higher quantiles.
Panel B of Table 3 presents the quantile regression results for the relationship between tax
avoidance and long-term cash effective tax rate. For ease of exposition, we only tabulate the
results of coefficients on FINEXP while the same set of control variables used in Equation (1)
are included in the regressions (but the coefficients on control variables are untabulated but
available upon request). The relation between tax avoidance and financial expertise differs in
both magnitude and statistical significance across the tax avoidance distribution. The financial
expertise coefficient is more negative and statistically more significant at the 80th percentile
than that at the 20th percentile. This result indicates that the impact of financial expert CEOs
is highest and most significant in firms with a low level of tax avoidance (high cash effective
tax rate) and supports our main hypothesis that the level of tax aggressiveness will be highest
when the current level of tax avoidance is low, i.e., the potential cost associated with tax
avoidance is low.

4.3. Corporate governance, financial expertise, and tax avoidance

Next, we test whether the impact of financial expert CEOs on tax avoidance is related to corporate
governance. We separate firms to quintile based on Institutional Ownership (IO): ‘HiInst’
(‘LoInst’) is a dummy variable that equals one if the firm’ institutional ownership is in the top
(bottom four) quintile of institutional ownership for all firms in the current year. We estimate the
following regressions:
320 H. HUANG AND W. ZHANG

X
CETRi;t ¼ α0 þ α1 HiInstt FINEXPi;t þ α2 LoInstt FINEXPi;t þ α Controlsi;k;t
K k
X X (2)
þ α Industry Fixed Effectsj þ
j j
α Year Fixed Effectst þ εi;t
t t

We also separate firms to quintile based on Entrenchment Index (E): ‘HiEindex’ (‘LoEindex’) is
a dummy variable that equals one if the firm’ Entrenchment index is in the top (bottom four)
quintile of entrenchment index for all firms in the current year.
X
CETRi;t ¼ α0 þ α1 HiEindext FINEXPi;t þ α2 LoEindext FINEXPi;t þ K k
α Controlsi;k;t
X X
þ α Industry Fixed Effectsj þ
j j
α Year Fixed Effectst þ εi;t ;
t t
(3)

The results are presented in Panel A of Table 4. Specification (1) shows a negative and
significant relationship between long-run cash effective tax rate (CETR) and the interaction
term between financial expertise and low institution ownership (LoInst). In contrast, the
relationship between CETR and the interaction term between financial expertise and high
institutional ownership is not significant. Our results suggest that that low level of institutional
ownership, which can be considered as a measure of external monitoring, motivates the impact
of CEOs with financial expertise on tax avoidance, while a high level of institutional ownership
mitigates the impact of CEOs with financial expertise on tax avoidance. This is consistent with
our hypotheses that CEOs with financial expertise will pursue more aggressive tax avoidance
policy when monitoring mechanism is weak and supports the intuition that management with
financial expertise views tax avoidance as a risky investment opportunity. Specification (2)
shows a negative and significant relationship between cash effective tax rate (CETR) and the
interaction term between financial expertise and low level of managerial entrenchment. In
contrast, the relationship between cash effective tax rate and the interaction term between
financial expertise and high institutional ownership is not significant. Our results suggest that
that low level of managerial entrenchment, which is a measure of managerial risk aversion,
motivates the impact of CEOs with financial expertise on tax avoidance, while a high level of
managerial entrenchment mitigates the impact of CEOs with financial expertise on tax avoid-
ance. This is consistent with our hypotheses that CEOs with financial expertise will pursue more
aggressive tax avoidance policy when they are less conservative and less risk-averse and also
supports the intuition that tax avoidance is viewed by management with financial expertise as
a risky investment opportunity.
Panel B of Table 4 presents the quantile regression results for the relationship between long-
term cash effective tax rate and the interaction between CEOs with financial expertise and
corporate governance. Our results indicate that the relationship between CETR and the interac-
tion between CEOs and corporate governance variables at a high level (HiInst and HiEindex) is, in
general, not significant. In contrast, the relationship between CETR and the interaction between
CEOs and corporate governance variables at a low level (LoInst and LoEnidex) varies significantly
across CETR distribution. The coefficient for the interaction term reaches its highest level of
economic and statistical significance at the 80th percentile and 90th percentile. This result
indicates that weak external monitoring and low-risk aversion encourage financial expert CEOs
to pursue aggressive tax avoidance policy when the firm’s level CETR (tax avoidance) is high
(low). This result supports our hypothesis that the level of aggressiveness will be highest when the
current level of tax avoidance is low, and the potential cost associated with tax avoidance is low.
Overall, our results suggest that the impact of CEOs with financial expertise on tax avoidance
results from an analysis of cost and benefit and is consistent with the characterization of tax
avoidance as a risky investment opportunity.
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 321

Table 4. The relationship between financial experts and tax avoidance.

Dependent Variable: CETR
Coefficients t statistics Coefficients t statistics
Panel A
HiInst_FinExp 0.013 (0.90)
LoInst_FinExp −0.019*** (−3.15)
HiEindex_FinExp 0.014 (0.78)
LoEindex_FinExp −0.020*** (−3.51)
Edummy 0.003 (0.46)
SIZE −0.006*** (−2.91) −0.006*** (−2.91)
PPE −0.018 (−1.60) −0.017 (−1.51)
dPPE −0.023 (−0.83) −0.024 (−0.87)
LEV −0.051*** (−3.21) −0.051*** (−3.22)
INTAN 0.039*** (3.07) 0.040*** (3.15)
RND −0.425*** (−7.46) −0.420*** (−7.42)
dNOL 0.156*** (3.66) 0.154*** (3.58)
d_NOL −0.010** (−2.11) −0.010** (−2.04)
FI −0.089 (−1.51) −0.088 (−1.50)
dFI 0.037* (1.71) 0.037* (1.70)
ROA 0.145*** (4.49) 0.145*** (4.44)
MTB −0.001* (−1.89) −0.001* (−1.93)
logAGE 0.024*** (4.46) 0.024*** (4.44)
Extra 0.731** (2.59) 0.726** (2.58)
Salesgrw −0.068*** (−7.69) −0.068*** (−7.71)
Year fixed effect Yes Yes
Industry fixed effect Yes Yes
Adj. R-squared 0.198 0.199
No. of observations 8,265 8,265
Dependent Variable: CETR
HiInst LoInst HiEindex LoEindex
Coefficients Coefficients Coefficients Coefficients
Quantile (t-statistics) (t-statistics) (t-statistics) (t-statistics)

Panel B: Quantile Regressions

0.10 0.021 −0.006 0.022** −0.010**
(0.97) (−1.44) (2.50) (−2.40)
0.20 0.018 −0.009* 0.009 −0.011***
(1.15) (−1.91) (0.88) (−2.65)
0.30 0.014 −0.016*** 0.004 −0.016***
(0.91) (−3.76) (0.34) (−4.49)
0.40 0.012 −0.013** 0.006 −0.013***
(0.76) (−2.40) (0.52) (−2.82)
0.50 0.012 −0.010*** 0.007 −0.010***
(0.82) (−2.95) (0.68) (−2.56)
0.60 0.018 −0.011*** 0.014 −0.011***
(1.43) (−2.92) (1.48) (−2.84)
0.70 0.032*** −0.012*** 0.014* −0.013***
(2.66) (−2.91) (1.82) (−2.90)
0.80 0.034** −0.019*** 0.022** −0.019***
(2.52) (−4.70) (2.01) (−5.05)
0.90 0.013 −0.024*** 0.020 −0.022***
(1.15) (−6.88) (0.91) (−4.69)
Year fixed effect Yes Yes
Industry fixed effect Yes Yes
Adj. R-squared 0.198 0.199
No. of observations 8,265 8,265
This table reports the relation between financial experts CEOs and long-run cash effective tax rates. The
sample covers observations for the years 1993 to 2013. Regression models in Panel B include
untabulated control variables and year and industry fixed effects. Variable definitions are shown in
Appendix A. The t statistics shown next to the estimated coefficients are based on standard errors
clustered by firm. ***, **, and * indicate two-tailed statistical significance at levels 1%, 5%, and 10%,
respectively.
322 H. HUANG AND W. ZHANG

5. Robustness check: managerial ability and firm fixed effect

So far, our results indicate that CEO’s with financial expertise pursue more aggressive tax
avoidance policy and measures of corporate governance also significantly influence tax
avoidance policy. Financial expertise, however, may not be the only reason behind aggres-
sive tax avoidance policy. Koester, Shevlin, and Wangerin (2016) show that executives with
a superior managerial ability are associated with a significant reduction in five-year cash
effective tax rate. It is possible that the impact of CEOs with financial expertise may conflate
with that of superior managers. As a robustness check, we run regressions based on
Equations (1–3) while controlling for the impact of managerial ability. Our panel regres-
sions so far have included year fixed effect and industry fixed effect. As another robustness
check, we account for firm-specific heterogeneity by running panel regressions based on
Equations (1–3).
Results are presented in Tables 5 and 6. After controlling for managerial ability, we note
from Table 5 that the coefficient for the financial expert CEOs dummy remains economically
and statistically significant, providing further support to our main hypothesis that CEOs
with financial expertise will pursue more aggressive tax avoidance policy. Table 5 also shows
that the relationship between cash effective tax rates and the interaction between financial
expert CEOs and corporate governance measures remain robust after controlling for man-
agerial ability, which further supports our second hypothesis that CEOs with financial
expertise will pursue more aggressive tax avoidance policy when monitoring mechanism is
weak and when managers are less entrenched and less risk-averse. Results presented in Table
6 indicate that the evidence supporting our research hypotheses remains robust after
accounting the firm-specific heterogeneity by incorporating firm fixed effect in our panel
regressions.

6. Annual cash effective tax rates

In our analysis, we consider five-year cash effective tax rates as the tax avoidance measure, as
a firm’s tax policy usually involves long-run tax planning. We further consider annual cash effective
tax rates as an alternative tax avoidance measure and examine whether a CEO’s financial expertise is
associated with short-term tax planning. If financial expertise of CEOs motivates them to expedite
tax planning process, we may observe a positive association between CEO financial expertise and tax
avoidance. Alternatively, aggressive tax policy associated with financial sophistication of CEOs may
take some time to be implemented in which case we may not find a significant association between
CEO financial expertise and tax avoidance on an annual cash effective tax rate. Our results on
annual cash effective tax rates are reported in column 1 of Table 7. On average, we do not find
a significant association between annual cash effective tax rates and financial expert CEOs, which
suggest that it may take time for financial expert CEOs to implement tax-planning policy. In column
2 and 3 of Table 7, we report the impact of monitoring mechanisms on tax avoidance. We find some
evidence that firms pursue a higher level tax avoidance when monitoring mechanisms are weak;
specifically, the coefficient on LoInst is negative and 10% significant in a one-tailed test, and the
coefficient on LoEindex is statistically significant at the 10% level. In unreported tests, using firm
fixed effects yields qualitatively similar results. This implies that a higher level of monitoring
expedite financial expert CEOs to pursue tax planning activities.

7. Conclusion
We conjecture that CEOs with financial expertise approach to tax avoidance as a risky
investment and study the impact of CEOs with financial expertise on tax avoidance. We
expand the scope of current literature by examining the relation both at the conditional mean
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 323

Table 5. The relationship between financial experts and tax avoidance, controlling for manage-
rial ability.
Dependent Variable: CETR
Coefficients Coefficients Coefficients
(t-statistics) (t-statistics) (t-statistics)
FINEXP −0.016***
(−2.80)
HiInst_FINEXP 0.013
(0.86)
LoInst_FINEXP −0.019***
(−3.08)
HiEindex_FINEXP 0.014
(0.76)
LoEindex_FINEXP −0.020***
(−3.44)
Edummy 0.002
(0.22)
MASCORE 0.008 0.006 0.008
(0.38) (0.31) (0.41)
SIZE −0.006*** −0.006*** −0.006***
(−2.81) (−2.78) (−2.82)
PPE −0.017 −0.017 −0.016
(−1.52) (−1.51) (−1.42)
dPPE −0.025 −0.025 −0.026
(−0.90) (−0.88) (−0.92)
LEV −0.049*** −0.049*** −0.049***
(−3.05) (−3.01) (−3.02)
INTAN 0.040*** 0.040*** 0.041***
(3.12) (3.11) (3.20)
RND −0.430*** −0.431*** −0.428***
(−7.58) (−7.60) (−7.57)
dNOL 0.164*** 0.165*** 0.163***
(3.84) (3.85) (3.78)
d_NOL −0.011** −0.011** −0.011**
(−2.32) (−2.34) (−2.27)
FI −0.104* −0.102* −0.102*
(−1.75) (−1.73) (−1.72)
dFI 0.039* 0.039* 0.038*
(1.81) (1.77) (1.77)
ROA 0.153*** 0.151*** 0.150***
(4.48) (4.46) (4.39)
MTB −0.001** −0.001* −0.001*
(−1.97) (−1.90) (−1.94)
logAGE 0.024*** 0.024*** 0.024***
(4.42) (4.42) (4.38)
Extra 0.747*** 0.756*** 0.751***
(2.59) (2.62) (2.61)
Salesgrw −0.070*** −0.070*** −0.070***
(−7.91) (−7.90) (−7.90)
Year fixed effect Yes Yes Yes
Industry fixed effect Yes Yes Yes
Adj. R-squared 0.197 0.197 0.198
No. of observations 8,142 8,142 8,142
This table reports the relation between financial experts CEOs and cash effective tax rates. The
sample covers 8,142 firm-year observations for the years 1993 to 2013. Variable definitions
are shown in Appendix A. The t statistics shown next to the estimated coefficients are based
on standard errors clustered by firm. ***, **, and * indicate two-tailed statistical significance
at levels 1%, 5%, and 10%, respectively.

and across tax avoidance distribution. We find evidence that the relationship between CEOs
with financial expertise and tax avoidance is consistent with the view that tax avoidance is
a risky investment.
324 H. HUANG AND W. ZHANG

Table 6. The relationship between financial experts and tax avoidance, firm fixed effect.
Dependent Variable: CETR
Coefficients Coefficients Coefficients
(t-statistics) (t-statistics) (t-statistics)
FINEXP −0.011***
(−2.91)
HiInst_FINEXP 0.012
(1.19)
LoInst_FINEXP −0.013***
(−3.34)
HiEindex_FINEXP 0.003
(0.38)
LoEindex_FINEXP −0.013***
(−3.27)
Edummy −0.003
(−0.57)
SIZE 0.003 0.003 0.003
(1.10) (1.14) (1.03)
PPE 0.045*** 0.045*** 0.045***
(4.72) (4.73) (4.71)
dPPE −0.018 −0.019 −0.017
(−1.00) (−1.02) (−0.96)
LEV −0.013 −0.013 −0.013
(−1.51) (−1.48) (−1.52)
INTAN −0.007 −0.007 −0.007
(−0.89) (−0.84) (−0.89)
RND −0.064 −0.065 −0.063
(−1.41) (−1.43) (−1.39)
dNOL 0.040 0.039 0.039
(1.61) (1.59) (1.58)
d_NOL −0.014*** −0.014*** −0.013***
(−4.48) (−4.50) (−4.41)
FI −0.234*** −0.234*** −0.233***
(−6.38) (−6.38) (−6.34)
dFI −0.031* −0.032* −0.030*
(−1.67) (−1.71) (−1.65)
ROA 0.016 0.015 0.014
(0.76) (0.76) (0.69)
MTB −0.001*** −0.001*** −0.001***
(−3.17) (−3.11) (−3.16)
logAGE −0.042*** −0.041*** −0.043***
(−6.64) (−6.44) (−6.60)
Extra 0.467*** 0.469*** 0.464***
(3.14) (3.15) (3.12)
Salesgrw −0.034*** −0.034*** −0.033***
(−5.43) (−5.42) (−5.41)
Firm Fixed Effects Yes Yes Yes
Adj. R-squared 0.588 0.588 0.588
No. of observations 8,265 8,265 8,265
This table reports the relation between financial experts CEOs and cash effective tax rates. The
sample covers 8,265 firm-year observations for the years 1993 to 2013. Variable definitions
are shown in Appendix A. ***, **, and * indicate two-tailed statistical significance at levels
1%, 5%, and 10%, respectively.

We find a negative and significant relationship between CEOs with financial expertise and
cash effective tax rates, which suggests that financial expert CEOs pursue more aggressive
tax avoidance policy. Results from quantile regression to that the relationship is stronger for
a lower level of tax avoidance, which suggests that CEOs with financial expertise pursue tax
avoidance more aggressively when the risk associated with tax avoidance is lower. When
interacting with corporate governance measures, the relationship between cash effective tax
 ASIA-PACIFIC JOURNAL OF ACCOUNTING & ECONOMICS 325

Table 7. The relationship between financial experts and tax avoidance using annual cash
effective tax rate.
Dependent Variable: CETR
Coefficients Coefficients Coefficients
(t-statistics) (t-statistics) (t-statistics)
FINEXP −0.008
(−1.14)
HiInst_FINEXP 0.027
(1.58)
LoInst_FINEXP −0.011†
(−1.45)
HiEindex_FINEXP 0.026
(1.32)
LoEindex_FINEXP −0.012*
(−1.66)
Edummy 0.019**
(1.97)
SIZE −0.008*** −0.008*** −0.008***
(−3.47) (−3.46) (−3.34)
PPE −0.030** −0.030** −0.028**
(−2.34) (−2.32) (−2.21)
dPPE 0.133*** 0.133*** 0.131***
(3.09) (3.10) (3.04)
LEV −0.044** −0.043** −0.043**
(−2.45) (−2.40) (−2.41)
INTAN 0.033** 0.033** 0.033**
(2.20) (2.20) (2.25)
RND −0.287*** −0.289*** −0.281***
(−4.20) (−4.23) (−4.14)
dNOL 0.152** 0.153** 0.148**
(2.50) (2.50) (2.42)
d_NOL −0.011* −0.011* −0.010*
(−1.84) (−1.86) (−1.75)
FI −0.223*** −0.222*** −0.218***
(−3.42) (−3.40) (−3.35)
dFI 0.032 0.031 0.030
(1.33) (1.30) (1.25)
ROA −0.027 −0.029 −0.030
(−0.66) (−0.70) (−0.72)
MTB −0.001 −0.001 −0.001
(−1.02) (−0.94) (−0.97)
logAGE 0.010* 0.011* 0.012*
(1.67) (1.67) (1.83)
Extra 1.696*** 1.707*** 1.711***
(3.40) (3.42) (3.43)
Salesgrw −0.171*** −0.171*** −0.172***
(−11.19) (−11.18) (−11.25)
Fixed Effects Industry, year Industry, year Industry, year
Adj. R-squared 0.096 0.096 0.097
No. of observations 8,265 8,265 8,265
This table reports the relation between financial experts CEOs and one-year cash effective
tax rates. The sample covers 8,265 firm-year observations for the years 1993 to 2013.
Variable definitions are shown in Appendix A. ***, **, and * indicate two-tailed statistical
significance at levels 1%, 5%, and 10%, respectively. † indicates significance at 10% level
in a one-tailed test.

rate and financial expert CEOs is strongest when the monitoring mechanism is weak and
when managers are less entrenched and less risk-averse. Overall, our results suggest that the
impact of CEOs with financial expertise on tax avoidance results from an analysis of cost
and benefit and is consistent with the characterization of tax avoidance as a risky investment
opportunity. Our study makes an important contribution to the literature that focuses on
the impact of CEO-specific heterogeneity on corporate performance.
326 H. HUANG AND W. ZHANG

Notes
1. In contrast, tax planning strategies such as accelerated depreciation for tax purposes will not alter GAAP effective
tax rate. GAAP effective tax rate also reflects tax accrual effects in the current tax expense.
2. This procedure excludes loss firms (defined as firms with negative adjusted pretax income (compustat data
PI – compustat data SPI)) from our sample.

Disclosure statement
No potential conflict of interest was reported by the authors.

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