The Labor Market Consequences of Executive Influence on Firm Tax Strategy

Abstract

Prior research has shown that executives can significantly influence firm tax strategy. However, we know little about the consequences of executive influence on firm tax strategy. I examine labor market consequences, which capture the financial and reputational consequences of executives’ actions. I find that executives face negative labor market consequences when they influence firm tax strategy. This finding is consistent with executive influence on firm tax strategy signaling to the labor market that executives are focusing on non-core activities of the firm. Further, this negative relationship is stronger among executives whose performance and characteristics are uncertain to the labor market as the labor market seeks additional information regarding these executives. These results are robust to alternative proxies of executive influence on firm tax strategy and alternative proxies of labor market consequences. By examining labor market consequences, I provide evidence of the consequences of executive influence on firm tax strategy. This study also furthers our understanding of how the labor market values and evaluates executives.