Does Tax Enforcement Deter Managers’ Self-Dealing?

61 Pages Posted: 29 Jul 2020 Last revised: 25 Oct 2021

See all articles by Benjamin Yost

Benjamin Yost

Boston College - Carroll School of Management

Susan Shu

Boston College - Carroll School of Management

Date Written: October 22, 2021

Abstract

This study examines the effect of corporate tax enforcement on managerial self-dealing, with a focus on manipulated gifts of insider stock. Prior work suggests that managers employ a variety of manipulative techniques to maximize their personal tax benefits from donating corporate stock, such as strategically timing gifts based on private information and fraudulently backdating gifts to the date with the highest price (Yermack, 2009; Avci et al., 2016). Building on prior literature suggesting that the tax authority can discipline managerial misconduct, we hypothesize that IRS scrutiny from a corporate tax audit raises managers’ perceived risk of detection, who refrain from making manipulated stock gifts while the firm is under audit. Using a novel, firm-specific measure to identify firms under audit, we find direct evidence that heightened scrutiny from tax enforcement serves as an effective monitoring mechanism and reduces managers’ self-dealing behavior.

Keywords: IRS, Monitoring, Tax Evasion, Stock Gifts, Insider Trading

JEL Classification: G14, G34, H26, K22, L31

Suggested Citation

Yost, Benjamin and Shu, Susan, Does Tax Enforcement Deter Managers’ Self-Dealing? (October 22, 2021). Available at SSRN: https://ssrn.com/abstract=3643129 or http://dx.doi.org/10.2139/ssrn.3643129

Benjamin Yost (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Susan Shu

Boston College - Carroll School of Management ( email )

Boston College
140 Commonwealth Ave.
Chestnut Hill, MA 02167
United States
617-552-1759 (Phone)

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