Corporate tax avoidance and the upper echelon effect: Evidence from segment disclosure choices

Abstract

Background: The determinants of corporate tax avoidance are still not adequately understood, which necessitates an investigation of the influence of the upper-echelon effect as a determinant of corporate tax avoidance.

Aim: To better understand the dynamics involved in the decision-making processes of the upper echelon and its relationship with corporate tax avoidance.

Setting: Financial data from Johannesburg Stock Exchange (JSE)-listed companies are used because those companies should comply with International Financial Reporting Standard (IFRS) 8, which provides the proxy mechanism used for the measurements of upper-echelon behaviour for this quantitative study.

Method: Multiple regression, supported by descriptive statistics, is used to test two hypotheses related to the aim.

Results: The upper echelon’s review of the tax expense at the segment level is indeed associated with corporate tax avoidance. Moreover, autocratic decision-making environments are also associated with more tax avoidance.

Conclusion: Upper echelon environments exhibiting autocratic behaviour are more likely to avoid tax. Companies disclosing tax as a segment-level expense, subject to the company’s routine internal review processes, are more likely to avoid tax, specifically in upper echelon settings that exhibit autocratic relational behaviour. The involvement of teams in the decision-making and monitoring process attenuates the effect of the internal review of the tax expense at the segment level as a medium to actively manage the tax expense.

Contribution: This study adds to the tax avoidance literature concerning management effects on tax avoidance. It investigates the link between the relational dynamics and cognitive processes of top management teams, mostly hidden from the public purview, and tax avoidance.