Equity Compensation and Tax Avoidance: Incentive Effect or Tax Benefits?

44 Pages Posted: 12 Apr 2011 Last revised: 19 Sep 2016

See all articles by Jeri K. Seidman

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Bridget Stomberg

Indiana University - Kelley School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2012

Abstract

We examine two competing explanations for the negative relation between equity compensation and tax avoidance documented in prior research. The first explanation suggests that equity compensation aligns managerial interests and reduces managers’ incentives to invest in tax avoidance schemes that facilitate rent extraction. The second explanation predicts that tax benefits from equity compensation reduce firms’ demand for additional tax avoidance by lowering its marginal benefits. We find evidence that the tax benefits from equity compensation, and not incentive alignment, drive the observed negative relation. Our findings suggest that researchers should consider the tax benefits of equity compensation to be of primary importance and control for these benefits when studying tax avoidance. Further, our results challenge the theory that managers use tax avoidance to facilitate rent extraction. Studies that rely on nefarious managerial behavior to motivate tax avoidance in the context of agency problems should reconsider the validity of this theory.

Keywords: Tax avoidance, equity incentives, tax benefits from equity compensation

JEL Classification: H25, M41, M52

Suggested Citation

Seidman, Jeri K. and Stomberg, Bridget, Equity Compensation and Tax Avoidance: Incentive Effect or Tax Benefits? (September 2012). McCombs Research Paper Series No. ACC-03-11. Available at SSRN: https://ssrn.com/abstract=1807096 or http://dx.doi.org/10.2139/ssrn.1807096

Jeri K. Seidman (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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