CEO Severance Pay and Corporate Tax Planning

Journal of the American Taxation Association, Forthcoming

46 Pages Posted: 30 Jun 2016 Last revised: 13 Aug 2019

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Jenny Xinjiao Guan

Monash University

Oliver Zhen Li

National University of Singapore (NUS)

Zhen Zheng

Xiamen University

Date Written: August 12, 2019

Abstract

We examine the association between CEO severance pay (i.e., payment a CEO would receive if s/he is involuntarily terminated) and corporate tax planning activities. We find that CEO severance pay is positively associated with corporate tax planning, consistent with CEO severance pay providing contractual protection against managers’ career concerns and thereby inducing otherwise risk-averse managers to engage in incremental levels of tax planning. This result holds under an instrumental variable approach and a propensity score matching, and survives alternative measures of CEO severance pay and corporate tax planning. Finally, we find that severance pay provides stronger tax planning incentives in situations where managers are expected to face greater career concerns – when they are less experienced, when they face stronger shareholder monitoring, and when they manage firms with higher idiosyncratic volatility. Overall, our results suggest that CEO severance pay represents a form of efficient contracting with otherwise risk-averse managers.

Keywords: Corporate Tax Avoidance; CEO Severance Pay; Risk-Taking Incentives

JEL Classification: M4, E62, M52

Suggested Citation

Campbell, John L. and Guan, Jenny Xinjiao and Li, Oliver Zhen and Zheng, Zhen, CEO Severance Pay and Corporate Tax Planning (August 12, 2019). Journal of the American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2802426 or http://dx.doi.org/10.2139/ssrn.2802426

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Jenny Xinjiao Guan

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Zhen Zheng

Xiamen University ( email )

Xiamen, Fujian 361005
China

Register to save articles to
your library

Register

Paper statistics

Downloads
449
Abstract Views
2,399
rank
63,943
PlumX Metrics