Managerial Short-Termism and Corporate Tax Avoidance
61 Pages Posted: 30 Jan 2022 Last revised: 17 Apr 2023
Date Written: January 25, 2022
CEOs with short-term equity incentives behave myopically out of concern for the stock price. We argue that corporate tax avoidance provides an avenue for managerial short-termism due to its immediate positive impact on stock prices. We show that vesting equity delta — a measure of short-term equity incentives — is associated with declines in cash effective tax rates. We also identify CEO equity sales as the underlying economic mechanism. Additional analyses indicate that vesting equity induces suboptimal tax avoidance, which is positively (negatively) associated with short-term (long-term) shareholder wealth. We mitigate endogeneity concerns by using vesting schedules determined several years prior and options acceleration before the adoption of FAS 123R as events plausibly exogenous to the current corporate tax avoidance environment.
Keywords: FAS 123R, firm valuation, myopia, short-termism, tax avoidance, vesting equity
JEL Classification: H25, H26, M12, M52
Suggested Citation: Suggested Citation