The effect of chief financial officers’ expert power on tax avoidance – Empirical evidence from Germany

The goal of this paper is to investigate the relationship between the CFO as a tax planner and corporate tax avoidance behavior in Germany. In line with upper echelon theory, we examine the effect of CFO's expert power on tax avoidance, which is measured by the effective tax rate. CFO's tax-specific work experience is used to measure expert power. The dataset consists of the two biggest German indices, DAX and MDAX. The results of our Ordinary Least Square model indicate a negative effect of CFO's expert power on the effective tax rate, meaning that experienced CFOs are more engaged in tax avoidance. In contrast to previous assumptions that upper echelon theory is only limitedly applicable in collectivistic countries, our results support the applicability of the theory in collectivistic countries such as Germany. Our findings provide practical implications insofar as firms may use the information of CFO's impact on tax planning to recruit new managers according to the general company strategy. Conclusively, our study is the first quantitative study in Germany that analyzes the impact of CFO expert power on tax avoidance behavior.