Managerial Short-Termism and Corporate Tax Avoidance

61 Pages Posted: 30 Jan 2022 Last revised: 17 Apr 2023

See all articles by Spyridon Gkikopoulos

Spyridon Gkikopoulos

The University of Machester - Alliance Manchester Business School

Edward Lee

University of Manchester - Alliance Manchester Business School

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: January 25, 2022

Abstract

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

Gkikopoulos, Spyridon and Lee, Edward and Stathopoulos, Konstantinos, Managerial Short-Termism and Corporate Tax Avoidance (January 25, 2022). Available at SSRN: https://ssrn.com/abstract=3979799 or http://dx.doi.org/10.2139/ssrn.3979799

Spyridon Gkikopoulos (Contact Author)

The University of Machester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

HOME PAGE: http://sp-gkikopoulos.com/

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://research.manchester.ac.uk/en/persons/k.stathopoulos

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