Equity Risk Incentives and Corporate Tax Aggressiveness

Journal of Accounting Research, Forthcoming

48 Pages Posted: 4 Feb 2009 Last revised: 14 May 2014

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Ryan J. Wilson

University of Oregon - Lundquist College of Business

Date Written: December 2012

Abstract

This study examines equity risk incentives as one determinant of corporate tax aggressiveness. Prior research finds that equity risk incentives motivate managers to make risky investment and financing decisions, since risky activities increase stock return volatility and the value of stock option portfolios. Aggressive tax strategies involve significant uncertainty and can impose costs on both firms and managers. As a result, managers must be incentivized to engage in risky tax avoidance that is expected to generate net benefits for the firm and its shareholders. We predict that equity risk incentives motivate managers to undertake risky tax strategies. Consistent with this prediction we find that larger equity risk incentives are associated with greater tax risk and the magnitude of this effect is economically significant. Our results are robust across four measures of tax risk, but do not vary across several proxies for strength of corporate governance. We conclude that equity risk incentives are a significant determinant of corporate tax aggressiveness.

Keywords: Tax Risk, Tax Aggressiveness, Equity Risk Incentives, Executive Compensation

JEL Classification: M41, H25, J33, M52, G34

Suggested Citation

Rego, Sonja O. and Wilson, Ryan J., Equity Risk Incentives and Corporate Tax Aggressiveness (December 2012). Journal of Accounting Research, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1337207

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Ryan J. Wilson

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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