Tax-related human capital: Evidence from financial reporting aggressiveness of boards with tax officer directors in China

Abstract

We investigate the impact of tax-related human capital (THC) on corporate financial reporting aggressiveness. Using the presence of former or current tax officers from tax authorities on a firm’s board of directors as a proxy for THC, we find that firms with tax officer directors report their earnings more aggressively than those without such directors. This relationship remains robust across alternative measures of aggressiveness, model specifications and various methods of addressing endogeneity concerns. Moreover, the level of aggressiveness is more pronounced when tax officer directors have previously served in local tax authorities, have experience in offices overseeing the firm’s income tax affairs or have held a senior position in tax authorities, particularly when firms are subject to lenient tax enforcement policies or higher statutory tax rates. These findings support that tax officer directors contribute to firms’ aggressive reporting practices through THC. Additional analyses suggest that firms with tax officer directors exhibit lower effective tax rates and a weaker association between effective tax rates and operating cash flows. Our findings collectively demonstrate that firms with tax officer directors possess significant THC and employ aggressive strategies in both financial and tax reporting practices.