Equity incentives and conforming tax avoidance

Abstract

We examine how executive equity incentives are associated with firms' conforming tax avoidance. Conforming tax avoidance is unique compared to nonconforming tax avoidance in that it decreases tax liabilities by reducing pretax income. Thus, conforming tax avoidance presents a unique set of consequences with important links to both risk and value‐creation incentives. Consistent with risk‐taking incentives increasing conforming tax avoidance, we find that linking executive wealth to stock price volatility (i.e., vega) is positively associated with conforming tax avoidance. We also find that linking executive wealth to stock price (i.e., delta) is negatively associated with conforming tax avoidance. The results of our cross‐sectional tests suggest that the negative association between delta and conforming tax avoidance is predominantly driven by a risk aversion effect rather than a value‐creation effect. Our findings add to the literature on the relation between tax avoidance and executive compensation, as well as the trade‐off between book and taxable income.

Board's informal hierarchy: influences on enterprise innovation quality

“…Existing research indicates that, as a long-term incentive mechanism, equity incentives can motivate management to share business profits and jointly bear risks. This encourages the management team to operate the company with a shareholder value maximization approach, effectively alleviating instances of managerial short-sightedness (Cai, 2023; Kara et al. , 2023).…”

“…Existing research indicates that, as a long-term incentive mechanism, equity incentives can motivate management to share business profits and jointly bear risks. This encourages the management team to operate the company with a shareholder value maximization approach, effectively alleviating instances of managerial short-sightedness (Cai, 2023;Kara et al, 2023). We hypothesize that when a company implements an equity incentive plan, the decision-making of directors with high status within informal hierarchies on innovation quality is more likely to gain management approval and execution.…”