Companies where women are CFOs are less likely to adopt risky tax strategies than companies managed by male CFOs, according to a new academic study.
The study, which appears in the current issue of The Journal of the American Taxation Association, published by the American Accounting Association, estimates that the probability of companies’ adopting a tax shelter (described as "a product whose useful life is apt to end soon after it is discovered by the Treasury") is 17.4 percent lower for companies with female CFOs than it is for those with male finance chiefs. At the same time, the paper suggests that the benefits of a lower tax rate may ultimately represent a negative for shareholders.
The gender difference in tax aggressiveness, the study found, is less the result of male rashness or overconfidence than of female aversion to risk, a trait that could "make firms miss valuable tax-saving opportunities." The research found evidence "that female CFOs' conservatism in tax strategy is diminished in firms with good corporate governance," where presumably the board and other top management provide correction to excessive caution.
The caution exhibited by women CFOs seems to have less to do with ethical principle than with the risk of losing their jobs, since the gender difference occurs only in industries with above-average management-turnover rates, according to the researchers. "Overall, the findings indicate that female CFOs are less tax-aggressive than males only when they have bigger concerns with their job security," said the study.
"On the one hand, women CFOs' caution with regard to extreme tax strategies is a strong point in their favor, given the financial and reputational damage firms can suffer from them," said Qiang Wu of Rensselaer Polytechnic Institute, who carried out the study with RPI colleague Bill B. Francis and Iftekhar Hasan and Meng Yan of Fordham University. "On the other hand, aggressive tax avoidance has proved highly popular in many of the leading firms in corporate America, and reluctance to engage in it is likely to be viewed unfavorably in many places."
Women currently constitute approximately 11 percent of the CFOs of firms in the S&P 500, a percentage that has budged only slightly over the past decade. In contrast, women constitute more than 60 percent of the auditors and accountants in the U.S.
The study's findings emerge from an analysis of tax aggressiveness (characterized as "the most extreme subset of tax avoidance activities") in cases where females replaced males as CFOs of companies in the S&P 1500, a group ranging from small caps to corporate behemoths. From a database of executive information, the researchers identified 92 transitions where each chief held the position for at least three consecutive years not counting the transition year. Tax strategies being largely private matters between companies and the IRS, the professors employed a variety of methods from the scholarly literature to ferret them out.
Specifically, aggressiveness was assessed through these three measures: 1) company adoption of a tax shelter, a high-risk strategy often based on a literal reading of regulations that is inconsistent with original legislative intent; 2) claims in public financial statements of tax benefits not yet recognized by the IRS, as evidenced by funds set aside as cushions in case the claims are disallowed; and 3) a measure of book-tax difference, an estimate of the disparity between the profits companies claim in public financial statements and what they claim to the IRS.
By all three standards, women CFOs proved to be significantly less aggressive in tax avoidance than their male predecessors. For example, the study estimated them to have been 17.4 percent less likely to adopt tax shelters.
The professors then proceeded to challenge their finding with variety of other tests. One reversed the order of transition, comparing aggressiveness where a male CFO succeeded a female chief. A second compared the difference in tax aggressiveness in male-to-female transitions with that seen in male-to-male transitions occurring at roughly the same time. A third compared tax aggressiveness of female CFOs with that of male CFOs of similar firms.
All three tests essentially confirmed the finding from the analysis of the 92 male-to-female transitions.
As part of their analysis of those 92 cases, the researchers also tested whether companies with female finance chiefs had higher effective tax rates than those with male CFOs, given the women's shunning of risky strategies. And here the gender difference disappeared. The study found "no evidence that female CFOs behave differently compared to their male counterparts in terms of broad tax-avoidance strategies," a finding that is consistent with inferences from earlier research. Noting that tax avoidance runs a spectrum from municipal bond investments at one end to such highly aggressive strategies as sheltering on the other, the professors "find no evidence that sample female CFOs behave differently from their male counterparts in less-risky tax-avoidance activities."
In conclusion, the researchers acknowledged that "prior studies find that female executives engage less in value-decreasing acquisitions, employ lower levels of debt, and promote better-quality financial reporting. We complement this line of research by identifying an aspect of decision-making by female CFOs that could be costly to firms. Specifically, female CFOs do not pursue all tax-saving opportunities, probably to avoid additional risk. With more and more companies having females in their top management team, it is increasingly important to fully understand potential benefits and costs of having female CFOs."
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