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Although generally women are believed to be more risk-averse, and more likely to follow regulations, researchers provide mixed evidence on whether female executives are more conservative than male executives. Some researchers find that female executives are more risk-averse than their male counterparts. Others suggest that female executives can be even more risk-taking because they would not have reached executive positions if they are conservative.

It is well accepted that tax avoidance is inherently risky. Hence, examining taxation strategies provides a good setting for gender research. Since chief financial officers (CFOs) are generally responsible for tax-related decisions, and their decisions reflect their risk profiles, we examine whether firms with female CFOs are less tax aggressive than those with male CFOs.

The theory

Intuitively, the answer is not clear.

On the one hand, tax avoidance is associated with legal risks. CFOs must spend significant time on tax planning and resolving audits from the tax authority. If tax avoidance activities are detected, firms will face monetary penalties from the authority and suffer reputational damage. If risk averse, female CFOs may engage in less tax avoidance than male CFOs because they have the inclination to avoid being audited or exposed to legal penalties and losses.

On the other hand, the tax management function can be a criterion in assessing a CFO’s performance, and failure to minimise corporate tax liabilities can affect one’s career (career risks). Corporate tax is a significant cost of doing business. Tax avoidance strategies, if implemented effectively, can help companies save on tax payments, improve cash flows and present better after-tax financial performance. Therefore, it is frequently used by management and shareholders as a measure to assess whether CFOs are competent among their peers.

Indeed, shareholders are risk-neutral and would like CFOs to utilise all possible opportunities to minimise corporate tax liabilities, subject to the cost and benefit trade-off. If CFOs cannot efficiently utilise available provisions to reduce corporate tax payments, they are likely to be regarded as incompetent and replaced thereafter. Such career risks, unfortunately, are higher for women than for men because of the conventional “professional ceiling” that female executives face. Hence, if a female CFO has a greater concern about career risk, she might be motivated to implement aggressive tax avoidance strategies to increase after-tax earnings and cash flows to retain her position and even earn a promotion.

The Chinese context

We believe that Chinese female CFOs might adopt more aggressive tax avoidance practices compared with their male counterparts.

In China where the legal environment is weaker and the litigation risk is lower, companies and their managers are more concerned with beating the earnings targets rather than lowering the legal risks. If CFOs do not undertake aggressive tax avoidance, they are more likely to present lower firm performance and even miss earnings targets. As a result, they might be regarded as incompetent and dismissed or not promoted. In other words, CFOs in China are more likely to be removed because of unsatisfactory corporate performance rather than due to legal penalties.

Such career concerns are greater for female CFOs than for male CFOs. The proportion of women who earn a top management spot is low in China because of the traditional male-dominant culture. Even though a few women have managed to enter the top management team, they face greater pressure than men, including facing double standards compared to male counterparts, getting lower payments and being judged by physical appearance. Females also have a lower rehire rate than males after resignation because of the disadvantage in social networking.

As a result, Chinese female CFOs have higher incentives to exhibit their competence at this position to break the workplace glass ceiling, to secure their jobs and to rise to higher positions.

Our research

We use a sample of Chinese companies listed on the Shanghai and Shenzhen Stock Exchanges during the period of 2009–2016 to conduct our analysis. Specifically, we estimate a regression model where the dependent variable is tax aggressiveness, the test variable is whether the CFO is a female, and an array of control variables that were found to affect tax aggressiveness by prior studies. We use three different tax aggressiveness measures to ensure the robustness of the study. They include the spread between the applicable/statutory tax rate and effective tax rate, the book-tax difference between pre-tax income and taxable income (scaled by beginning total assets), and the residual from regressing total book-tax differences on total accruals and firm fixed effects.

Our results are consistent with the hypothesis that firms led by a female CFO avoid tax more aggressively than those by male CFOs. This supports the view that Chinese female CFOs are more concerned about career risks that arise from presenting poor financial performance.

Next, we find that the positive relationship between female CFOs and tax aggressiveness is weaker if firms are located in regions with a better legal environment. The underlying rationale is that although Chinese female CFOs generally opt to pursue aggressive tax avoidance because of career concerns, the legal and regulatory risks might dominate their calculation of risk in certain regions with a strong legal system.

We further find that the positive association between CFO gender and tax aggressiveness are weaker in state-owned enterprises (SOEs). State ownership and control is an important feature of the Chinese economy. Given the government has multiple objectives to achieve, top managers including CFOs in SOEs are assessed based on not only financial performance but also political and social indicators such as jobs creation and taxation payments. In contrast, for non-SOEs the economic performance of the firm is the main consideration. Hence, female CFOs in non-SOEs have more concerns about corporate performance compared with their counterparts in SOEs, resulting in a greater motivation to avoid tax.

In summary, our study is consistent with the argument that CFOs decide tax avoidance strategies based on the trade-off between legal and career risks.


Further reading

Liu, X, Li, M, Tong, JY and Zhang, F 2022, ‘CFO gender and tax aggressiveness: evidence from China’, Pacific-Basin Finance Journal, vol. 71, February 2022, 101679.

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