Tax Aggressive Behaviour in Private Family Firms - the Effect of the CEO and Board of Directors

Tax aggressiveness is defined as downward management of taxable income through tax planning activities which can be legal or illegal or may lie in between. Given that taxes are an important cost for each firm, tax aggressiveness may be desired by its shareholders. In this paper, we investigate to what extent CEO ownership and governance (e. g. composition of the board of directors) affect tax aggressive behavior decisions in private family firms. More specifically, we extend prior knowledge by studying how board's monitoring behavior may moderate the relationship between the CEO's involvement in the firm and tax aggressive behaviour of the firm. The data, collected through a private survey, consist of 600 Finnish family and non family SMEs and is a panel with observations from the years 2000-2005. The model is estimated based on robust Ordinary Least Squares estimations including several moderating effects. In this paper, we find that private family firms appear to be less tax aggressive than private non family firms. Even though tax aggressive behaviour provides tax savings and allows the CEO to mask rent extraction (e. g. earnings management, perquisite consumption, excessive salaries.) to the detriment of other shareholders, the non financial costs being the possible reputation damage and loss of socioemotional wealth seem to outweigh the benefits. Within the group of private family firms, results show that family firms with a lower CEO ownership share are more eager to engage in tax aggressive behaviour. This result highlights the importance of the unique agency conflict between the CEO (agent and possibly principal) and (other) shareholders (principals) in determining family firms' tax reporting. Finally, our results show that the presence of an outside director in the board of directors improves the monitoring effectiveness which reduces the tax aggressive behavior of those private family firms with low CEO ownership shares.