Study: Board Replace CEOs when Taxes Stray Too Far From Middle

Chris Gaetano
Published Date:
Jan 8, 2018

A recent study has found that corporate boards seem to prefer a tax rate that is neither too high nor too low, as extremes in either direction are correlated with decisions to replace the CEO, according to Accounting Web. The study, published by the American Accounting Association, analyzed the effective tax rates of about 5,100 public companies during a 14-year period and the correlation of forced departures of the companies’ CEOs. What was found was that CEOs are 20 percent more likely to lose their jobs when company tax rates are high compared to similar companies, and 15 percent more likely to lose their jobs when the company's tax rates are too low compared to similar companies. While CEOs getting the boot for a high tax rate doesn't seem too unusual, why would boards replace them if their taxes were too low? The study posits that, since the passage of the Sarbanes-Oxley Act, there has been more federal scrutiny and regulation, which has made boards wary of overly aggressive tax positions. Basically, when taxes are too low, boards believe it draws too much negative attention from both regulators and the public as a whole. This view is bolstered by findings that, when the CEO is replaced, they tend to move the company's tax rate closer to their peers. 

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