This study analyzed the impact of CEO age, major shareholder share, and foreign shareholder share on tax avoidance.
In addition, the effects of the interaction between the CEO age and the major shareholder share on tax avoidance and the effects of the interaction between the CEO age and the foreign shareholder share was analyzed.
Among the companies listed on the KOSPI and KOSDAQ markets, an empirical analysis was conducted using 8,829 corporate-year samples from 2012 to 2019, and the tax avoidance measure used the difference between book and tax profit (TA), a tax avoidance amount estimated using Desai and Dharmapala (2006).
The empirical analysis results are as follows.
First, it was observed that the younger the CEO age, the more tax avoidance tendencies increased significantly. This shows that young managers in the early stages of their career are willing to make risk-taking decisions to prove their abilities because of their long remaining future careers, and older managers are willing to avoid making risky decisions that can destroy their reputation because they want to protect their long-standing reputation throughout their careers. From a psychological point of view, young managers are more likely to be overconfident than older managers, and are more likely to make risk-preferred decisions.
Second, it was observed that the tendency to avoid taxes significantly decreases as the share of major shareholders increases. The result proves that the larger the share of major shareholders increases, the more negative the tax avoidance is. If tax evasion is detected, it will be recognized as a tax evasion company, dealing a fatal blow to corporate management. They can also gain growth opportunities with a good corporate image. For this reason, interest in transparent management has grown, which can be interpreted as negative for tax evasion.
Third, it was observed that the greater the share of foreign shareholders, the more likely the tendency to avoid taxation. This proves that the greater the share of foreign shareholders, the more negative they are to avoid taxes. And in Korea, it is difficult to carry out effective tax strategies due to the high consistency of accounting and tax returns, so it can be thought that foreign shareholders choose to increase financial profits and use a strategy to bear the increased tax burden accordingly. It is also interpreted that foreign shareholders believe that the decrease in transparency caused by tax avoidance and the increase in agency costs caused by information asymmetry will exceed the benefits generated by tax avoidance.
Fourth, it was observed that the interaction between the CEO age and the major shareholder''s share significantly decreased the tax avoidance propensity. This was not addressed in the preceding study. When the CEO age is low, the entity''s tax avoidance increases. However, for companies with a high share of major shareholders, tax avoidance decreases even when the CEO age is low. This can be interpreted as a company with a sound corporate governance structure controlling the tax evasion of young managers through an efficient monitoring function.
Fifth, it was observed that the tax avoidance propensity decreased significantly in the interaction between the CEO age and the share of foreign shareholders. This was not addressed in the preceding study. When the CEO age is low, the entity''s tax avoidance increases. However, for companies with a high share of foreign shareholders, tax avoidance decreases even if the CEO age is low. This can be interpreted as a company with a sound corporate governance structure controlling the tax evasion of young managers through an efficient monitoring function.