Executive Inside Debt and Corporate Tax Avoidance

FAccT Center Working Paper Nr. 22/2016

45 Pages Posted: 25 Apr 2016

See all articles by Anna Alexander

Anna Alexander

University of Padua

Martin Jacob

University of Navarra, IESE Business School

Date Written: April 22, 2016

Abstract

This study examines the relation between executives’ inside debt holdings and corporate tax risk. As executives’ inside debt holdings are unsecured and unfunded, they should align executives’ interests with those of outside debtholders and incentivize executives to act more conservatively toward risk. Hence, inside debt should also reduce the risk of tax avoidance activities. Consistent with this prediction, we find that executive inside debt holdings are negatively related to tax risk. Further, this relation becomes stronger at higher levels of tax risk. We also find that the relation between insider debt and tax risk is stronger for firms that are not facing liquidity constraints and among well-governed firms. The latter result implies that institutional ownership and inside debt compensation are substitutes in reducing tax risk. Overall, our results suggest that part of the observed cross-sectional difference in tax avoidance can be explained by a reduction in tax risk that is related to executive inside debt holdings.

Keywords: Tax risk, executive compensation, corporate governance

JEL Classification: M41; M52; H26; G34

Suggested Citation

Alexander, Anna and Jacob, Martin, Executive Inside Debt and Corporate Tax Avoidance (April 22, 2016). FAccT Center Working Paper Nr. 22/2016, Available at SSRN: https://ssrn.com/abstract=2768888 or http://dx.doi.org/10.2139/ssrn.2768888

Anna Alexander

University of Padua ( email )

Padua, Vicenza
Italy

Martin Jacob (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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