Equity Compensation and Tax Avoidance: Disentangling Managerial Incentives from Tax Benefits and Reexamining the Effect of Shareholder Rights

Posted: 23 Jun 2016 Last revised: 17 Mar 2017

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

Date Written: June 1, 2016

Abstract

Much empirical evidence is consistent with properly incentivized executives engaging in more tax avoidance. However, other studies provide evidence consistent with tax avoidance facilitating managerial rent extraction. We address these mixed results by reexamining the negative relation between executives’ equity compensation and tax avoidance that is concentrated in firms with weaker shareholder rights. We propose this pattern of results is consistent with tax exhaustion theory because tax benefits from equity compensation reduce firms’ demand for additional tax avoidance. Further, we draw on evidence suggesting shareholder rights indices are problematic as measures of governance when examining tax avoidance. Our results suggest tax exhaustion is a more compelling explanation for the relation between executives’ equity compensation and tax avoidance. Although our analyses do not disprove the notion that managers can use tax avoidance to facilitate rent extraction, they challenge the interpretation of early evidence suggesting this behavior is widespread.

Keywords: tax avoidance, tax exhaustion, equity incentives

JEL Classification: H25, H26, M41, M52

Suggested Citation

Seidman, Jeri K. and Stomberg, Bridget, Equity Compensation and Tax Avoidance: Disentangling Managerial Incentives from Tax Benefits and Reexamining the Effect of Shareholder Rights (June 1, 2016). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2798895 or http://dx.doi.org/10.2139/ssrn.2798895

Jeri K. Seidman

University of Virginia - McIntire School of Commerce ( email )

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