Abstract
This study examines whether firms become more or less tax aggressive in the years leading up to their CEO’s retirement and whether any such career horizon effect varies with the CEO’s equity interest in the firm. Using a fixed-effects regression model and an unbalanced panel of 4,432 firm-year observations covering the period 1995-2007, we find that firms whose CEOs are at least 65 years of age (i.e., are near retirement) are less tax aggressive on average than are firms with CEOs with longer career horizons. Further, we find that this career horizon effect is driven entirely by CEOs who possess outstanding exercisable stock options. We find no such effect for CEOs who own shares of company stock or possess neither options nor stock. These results are robust to similar tests using actual timing of retirement while controlling for CEO age for a subsample of our data. Consistent with prospect theory, our findings suggest that CEOs with shorter-horizon equity interests make less risky decisions (at least with respect to tax reporting aggressiveness) as their career horizon shortens