How Do CEO Incentives Affect Corporate Tax Planning and Financial Reporting of Income Taxes?

Posted: 13 Feb 2013 Last revised: 17 Mar 2017

See all articles by Kathleen Powers

Kathleen Powers

University of Tennessee, Knoxville - College of Business Administration

John R. Robinson

Texas A&M University; Texas A&M University - Department of Accounting

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: August 30, 2015

Abstract

We examine how different accounting metrics used to evaluate CEO performance for annual bonuses affect the level of corporate tax planning as well as financial reporting for income taxes. We predict and find that firms using cash flow metrics report lower GAAP and cash effective tax rates (ETR) than firms using earnings metrics. We also find that firms using after-tax earnings metrics report lower GAAP ETRs but similar cash ETRs as firms using pre-tax earnings metrics. Further analyses show that firms using after-tax earnings metrics are more likely to designate foreign earnings as permanently reinvested and have lower discretionary reserves for tax uncertainty. Hence, it appears that both types of firms engage in similar levels of tax planning, but firms evaluating CEOs with after tax-earnings metrics incentivize different financial reporting choices.

Keywords: Effective tax rate, Performance metrics, Executive compensation, After-tax compensation

JEL Classification: H25, M41, M52

Suggested Citation

Powers, Kathleen and Robinson, John R. and Stomberg, Bridget, How Do CEO Incentives Affect Corporate Tax Planning and Financial Reporting of Income Taxes? (August 30, 2015). Review of Accounting Studies,Vol. 21, No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2216856 or http://dx.doi.org/10.2139/ssrn.2216856

Kathleen Powers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

John R. Robinson

Texas A&M University ( email )

mail stop 4353
Mays School of Business
college state, TX 77843-4353
United States
979-845-3457 (Phone)
979-845-0028 (Fax)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Bridget Stomberg (Contact Author)

Indiana University - Kelley School of Business ( email )

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

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