The Role of Taxes in Compensation: A Case of Shareholder Expropriation

European Accounting Review, Forthcoming

Posted: 13 Jul 2009

Multiple version iconThere are 2 versions of this paper

Date Written: June 16, 2009


In this paper I exploit a unique feature of the Greek institutional environment, whereby alternative cash compensation payments to directors are taxed differently from the point of view of both personal and corporate taxes. Board directors can receive cash compensation either in the form of taxable salary or in the form of tax-free profit distributions. Salary payments are deductible for corporate tax purposes whereas profit distributions are not, making a unit of profit distribution more costly to shareholders than a unit of salary. Ceteris paribus, rational directors prefer profit distribution to salary given that in the former case their personal taxes are paid by shareholders. Using this setting I document that board directors increase their net compensation by shifting their personal taxes to outside shareholders, who consequently earn lower after-tax income. Moreover, I show that profit distributions reduce shareholder value. Collectively, my findings are consistent with board compensation via profit distributions indicating shareholder expropriation. I also find that the degree of tax-shifting reduces as board ownership increases. This is particularly the case for family board members. Overall, the study’s results have implications for both researchers and financial reporting regulators considering compensation issues.

Keywords: Taxes, executive compensation, managerial ownership, shareholder expropriation, family control, income shifting

JEL Classification: H24, M10, M41

Suggested Citation

Florou, Annita, The Role of Taxes in Compensation: A Case of Shareholder Expropriation (June 16, 2009). European Accounting Review, Forthcoming, Available at SSRN:

Annita Florou (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, 20136


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