Is the Market Grossed out by Gross-Ups? An Investigation of Firms that Pay Their CEOs' Taxes

45 Pages Posted: 25 Jan 2017

See all articles by Jeffrey L. Hoopes

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law

Ryan J. Wilson

University of Oregon

Date Written: January 23, 2017

Abstract

This study provides evidence on whether investors value tax gross-up provisions for executives, and how the elimination of these provisions changes executive compensation. We examine the market response to tax gross-up eliminations and find investors react favorably to the removal of these provisions, suggesting that on average, investors perceived these agreements as a bad compensation practice that destroyed firm value. Next, we examine whether firms respond to these eliminations by increasing other forms of executive compensation. We find firms eliminating tax gross-up provisions increase bonus but not salary. Broadly, we provide evidence that some features of compensation contracts are not valued by shareholders, and that the elimination of these features can lead to increased firm value.

Keywords: Executive Compensation, Corporate Governance, Tax, Tax Gross-Up

JEL Classification: J33, J41, H24, H25, G14, G18

Suggested Citation

Hoopes, Jeffrey L. and Tian, Xiaoli (Shaolee) and Wilson, Ryan J., Is the Market Grossed out by Gross-Ups? An Investigation of Firms that Pay Their CEOs' Taxes (January 23, 2017). Available at SSRN: https://ssrn.com/abstract=2904769 or http://dx.doi.org/10.2139/ssrn.2904769

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Ryan J. Wilson (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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