title: Accounting and finance sustainability, tax avoidance and top executive characteristics
Creators: name: Xu, Tianyue
Publisher: name: University of Glasgow
Year: 2024

description: Climate concerns have arisen as a substantial worldwide challenge for modern society, compelling the international community to support the notion of sustainable development and commitment to collaborative efforts. However, for corporations, sustainability is not only a critical necessity for our continued existence but also the correct course of action. In the past, corporations frequently prioritized profit maximization over their societal and environmental obligations and responsibilities, resulting in problems such as environmental pollution and resource depletion.

Green bonds, as novel financial instruments, facilitate investments by corporations in initiatives that are beneficial to the environment. Green bonds allocate capital towards particular environmentally sustainable initiatives. It generates tangible contributions to environmental and social progress while providing positive externalities for bond issuers and investors. At the same time, corporate social responsibility (CSR) and sustainable development are closely related. In light of the ongoing global warming phenomenon, the concept of CSR has progressed from being a simple ethical obligation to becoming an essential business strategy that aims to combat climate issues and advance sustainable development. CSR encompasses a wide range of stakeholders, including employees, customers, suppliers, the general public, the environment, and the fulfilment of the economic interests of shareholders. Companies that actively participate in CSR effectively integrate economic, social, and environmental dimensions, demonstrating the core aspects of sustainable development.

Nevertheless, sustainable development-impeding behaviours are still persistent. Corporate tax avoidance is regarded as an unethical strategy to minimize tax liabilities in the pursuit of profits. This contradicts the fundamental aspects of sustainable development and even presents a potential financial threat to the nation. Additionally, tax avoidance may significantly damage the reputation of companies due to the increasing societal expectations regarding corporate ethics and social responsibility. This may have a detrimental effect on firms' sustainable strategy.

Top executives, as the top group of leaders in corporations, have massive influence over the accounting and finance sustainability and tax avoidance strategy through their characteristics. It is critical to achieve the balance between short-term gains and long-term goals, which determines the firms' trajectory and their capacity to adapt to the dynamic challenges of the business environment.

In Chapter 2, I investigated the influence of Chief Executive Officers (CEOs) overconfidence on the relationship between corporate social responsibility (CSR) and tax avoidance. Prior studies on the relationship between CSR and tax avoidance have found mixed results. One argument is the corporate culture perspective that organizations that engage in CSR activities may have a stronger reputation. Due to the incentives to protect their reputation, CEOs are less likely to engage in tax avoidance. However, some riskmanagement studies suggest that CEOs engage in CSR activities to improve firm reputation and the confidence of stakeholders, leading them more actively engage in tax avoidance. Moreover, the upper echelons theory suggests that manager characteristics play a crucial role in corporate decisions as well as financial factors. Overconfidence as one of the most common psychological characteristics are prevalent among CEOs.

Using a dataset of listed Chinese companies, I find that firms with higher CSR scores systematically exhibit higher tax avoidance. Evidence shows that this relationship is moderated in firms with overconfident CEOs. I contend that overconfident CEOs are less likely to strategically use CSR as a risk-management tool. Additional analyses show that this moderating effect comes mainly from non-state-owned enterprises (non-SOEs). The conclusion stands up to a battery of sensitivity tests, including the use of CSR subdimensions.

In Chapter 3, I ask whether the general managerial skills that Chief Financial Officers (CFOs) gain from lifetime work experience affect corporate tax avoidance. The work experience of executives is an intangible asset that can offer a competitive advantage for the company. On the one hand, CFOs, as the company's financial leaders, may consider shareholder value maximization as their primary responsibility, with the opportunity of earning greater compensation and bonuses by engaging in tax avoidance. The work experience of CFOs enhances their knowledge of tax laws, accounting standards, and compliance needs, as well as their social capital to collaborate with authorities. Their diverse work experience provides them advanced knowledge and market trends to rapidly identify the tax planning opportunities. However, in order to protect their professional reputation from legal and ethical risks, CFOs with more work experience could be more caution about aggressive tax avoidance strategies. If the opportunity costs of engaging in tax avoidance activities (including legal risks, time, and resource expenses) exceed the potential economic advantages, experienced managers may transfer resources to more productive management activities and engage in less tax avoidance. Moreover, Chinese CFOs encounter a range of complex obligations due to the complex business environment, evolving tax regulations, and government intervention. The extensive work experience provides CFOs with a solid knowledge base and valuable social capital, which enable them to promptly understand and respond to regulatory changes while also identifying opportunities for tax planning.

Based on this line of research, I argue that the accumulated general management capital of CFOs, acquired via work experience, might have a significant impact on the tax planning strategies of companies. I use a sample of hand-collected data for Chinese-listed companies to develop and validate a new CFO managerial skills index based on four dimensions of CFO work experience: (1) the number of current positions a CFO holds, (2) the number of functional departments a CFO has worked in, (3) the number of firms the CFO has worked for, and (4) whether the CFO has political connections. This index, including a subcomponent for political connections, is particularly appropriate when studying emerging economies that tend to be “relationship-based” rather than “market-based.” I find that CFOs with high general managerial skills are more likely to engage in aggressive tax avoidance. This effect is weaker among CFOs who are approaching retirement, are in their first year of employment, or are too busy. These findings are robust to the inclusion of a comprehensive list of relevant control variables, the use of an instrumental variable, and a battery of other sensitivity tests.

In Chapter 4, I investigate whether the characteristics of CEOs impact corporate green bond issuance. Green bond issuance is a crucial source of capital and of crucial strategic value for firms. It not only reduces the burden of financing procedures but also establishes a trustworthy reputation for firms. Firms issuing green bonds demonstrate a commitment to environmentally friendly values. It helps to mitigate potential risks and promotes the growth of the company's value with long-lasting competitive advantages. However, it also raises the concern of greenwashing. Companies may employ deceptive marketing strategies to falsely represent themselves as environmentally conscious, which attempt to attract conscientious consumers while avoiding actual sustainable behaviours. However, CEOs' varying characteristics and evolving career horizons may influence their decisions. Green bond issuance plays a crucial role in aligning CEOs' interests with long-term strategic development in companies. CEOs could be highly motivated to advocate for sustainability initiatives due to the strong connection between personal benefit and environmentally friendly initiatives. Nevertheless, CEOs may be inclined to prioritize short-term monetary gain at the expense of long-term development of environmental sustainability. This could constitute greenwashing for the purpose of maximizing personal gain. Hence, I investigate how CEOs' lengthier tenures, approaching retirement, and foreign experience affect green bond issuance decisions.

I employ the propensity score matching (PSM) method to pair firms that have issued green bonds with their closest neighbour that does not issue green bonds. Focusing on Chinese A-share listed companies issuing green bonds from 2016 to 2021, I find that CEOs with lengthier tenures are more prone to issue green bonds. This tendency may stem from their heightened commitment to long-term company growth, the allure of long-term financial incentives, and the desire to safeguard personal reputation and legacy. Additionally, I observe that CEOs nearing retirement exhibit a higher propensity to engage in green bond issuance. This inclination could stem from the belief that green investments may contribute to the future value of the firm, thereby enhancing the pension and other benefits for retired CEOs. Finally, CEOs with international experience are also likelier to engage in green bond projects. I theorize that this is a result of their exposure to different cultural, economic, and legal environments. Additionally, their limited experience with green bonds may reduce the possibility of issuing green bonds numerous times per year. This unfamiliarity may impede their contacts with local political authorities, businesses, and other influential entities, constraining their ability to promote and advocate for green bonds actively.

In conclusion, this research explores the intricate dynamics among accounting and financial sustainability, corporate tax avoidance, and CEO and CFO characteristics in Chinese listed firms. The first investigation contributes valuable insights into the nuanced relationship between CSR, tax avoidance, and CEO overconfidence, enhancing our understanding of the psychological factors shaping corporate decision-making. Furthermore, the investigation into CFOs' general managerial skills highlights the balance between managing financial strategies and navigating the complexities of tax planning. Finally, the exploration of CEO characteristics in the context of green bond issuance provides a deeper understanding of how CEO traits influence sustainable strategic decisions for green bonds. It extends our comprehension of the role of leadership in shaping sustainable strategic decisions. Understanding CEO characteristics becomes critical in promoting sustainability within corporate financial strategies as businesses worldwide strive to align their operations with environmentally conscious practices. The findings of this study provide valuable insights for organizations striving to establish sustainable and responsible business practices as they confront the ongoing challenges associated with ethical financial decision-making. At the same time, I offer corporate managers and policymakers a deep understanding of strategies that balance financial objectives with sustainability goals in the evolving global business environment.