Equity Compensation and Tax Sheltering: Are They Negatively Related due to Incentives or Tax Benefits?

46 Pages Posted: 5 Aug 2011 Last revised: 15 Aug 2018

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: April 23, 2012

Abstract

We examine two competing explanations for the negative relation between equity compensation and tax sheltering documented in prior research. The first explanation suggests that equity compensation aligns managerial interests and reduces managers’ incentives to invest in tax shelters that facilitate rent extraction. The second explanation predicts that tax benefits from equity compensation reduce firms’ demand for tax shelters by lowering the marginal benefit of further tax avoidance. Using both cross-sectional and time-series tests, we find evidence that the negative relation more likely results from the tax benefits of equity compensation. This evidence suggests that it is the tax benefits from equity compensation, and not incentive alignment, that drives the observed negative relation. Our findings imply that researchers who study tax avoidance in the context of agency problems should consider the tax benefits of equity compensation as a primary influence.

Preliminary and Incomplete. Please do not quote without permission of the authors.

Keywords: stock option compensation, tax sheltering

JEL Classification: H26, M41, M52

Suggested Citation

Seidman, Jeri K. and Stomberg, Bridget, Equity Compensation and Tax Sheltering: Are They Negatively Related due to Incentives or Tax Benefits? (April 23, 2012). 2011 American Accounting Association Annual Meeting - Tax Concurrent Sessions. Available at SSRN: https://ssrn.com/abstract=1904936 or http://dx.doi.org/10.2139/ssrn.1904936

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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