CEOs who take risks with sports may do the same with taxes

CEOs who prefer risky sports hobbies are more likely to take a risky approach to their company’s tax planning, according to a new study published by the American Accounting Association.

The study, from researchers at the University of Hong Kong, the University of California Irvine, the National University of Singapore, and the University of Nottingham Ningbo, examined the tax strategies of corporate chiefs whose reported hobbies included risky sports such as car racing and windsurfing, in contrast with those whose sports hobbies were less risky such as playing golf or simply watching football games.

The paper, which appears in the spring issue of the Journal of the American Taxation Association, published by the AAA, suggests that the riskier a CEO’s hobbies are, the more risk they’re comfortable with exposing their company to when it comes to the corporate tax strategy. CEO sports hobbies could become a possible tool for auditors interested in assessing corporate tax risk or even for integrated reporting.

“CEOs can set the tone of a company’s tax planning decisions, and many stakeholders are interested in the extent to which CEOs are willing to expose their companies to increased risk,” says Shuqing Luo, co-author of the study and an associate professor of accounting at the University of Hong Kong, in a statement. “Evidence in the psychology literature indicates that sports hobbies reflect the personal risk preferences of the participants. We wanted to examine how a CEO’s personal risk preferences, as reflected in the sports they enjoy, are also reflected in the tax planning of that CEO’s company.” 

The researchers collected data on 732 CEOs of U.S. companies, using self-reported data on sports hobbies from the CEOs, as well as nationwide sports injury rates to determine each sport’s risk level. For example, windsurfing and motor sports were relatively riskier, while jogging and boating presented much lower levels of risk. 

The researchers employed four measures to assess the extent to which each CEO’s company was aggressive in tax planning, including the amount of tax each company paid relative to its profit and whether the companies set up tax shelters. The professors did a series of tests to see if there was any relationship between the sports and tax planning data, and found that firms managed by CEOs with riskier sports hobbies were more aggressive in their tax planning. 

“This association was particularly pronounced for CEOs who had greater financial incentives and greater decision-making power,” said Lirong Shi, co-author of the study and an assistant professor of accounting at University of Nottingham Ningbo, in a statement. 

The researchers believe their findings could be valuable for a wide array of business stakeholders. 

“For example, if you’re a board member, and you’re hiring a CEO, it can be difficult to get a candid assessment of a candidate’s risk preferences,” Luo said in a statement “Our work suggests that looking at a candidate’s sports preferences can provide some insight into the candidate’s risk preferences. Similarly, investors, analysts, bankers and others may be interested in having an additional means of assessing the risk preferences of a company’s top executives. There are also applications for the accounting community in particular. For example, this may be a valuable tool for auditors when assessing a client’s risk profile.” 

Additional co-authors on the study were Terry Shevlin, a professor of accounting at the University of California, Irvine; and Aimee Shih of the National University of Singapore.