Overconfidence and Corporate Tax Policy

Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. Overconfident CEOs are more likely to overestimate the net benefits from investments in tax planning and thus avoid more tax. Consistent with this prediction we find robust evidence of a positive relation between proxies for corporate tax avoidance and CEO overconfidence. Because our empirical tests use a panel of firm-years with exogenous CEO changes and include controls for stationary firm effects, we are able to isolate the role of an idiosyncratic personality trait (overconfidence) on corporate tax outcomes, thus adding to the literatures on overconfidence and tax avoidance.