Executive Equity Compensation and Corporate Tax Behavior: Exploring The Role of Cash ETR Persistence

Date

2019-08

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Abstract

This paper examines the relation between executive equity compensation and corporate tax behavior. Specifically, it asks whether executive equity compensation motivates managers to minimize future cash effective tax rates (Cash ETR) without increasing future unrecognized tax benefits (UTB). To address this question, I develop a measure of Cash ETR persistence that captures the state of a firm’s existing tax strategy as well as its effect on future tax outcomes. After accounting for the effect of the extant firm tax strategy, I find support for the predictions of De Waegenaere, Sansing, and Wielhouwer (2015). I document that the informational content of Cash ETR about future effective tax rates, as measured by Cash ETR persistence, allows managers to improve firm tax strategy by saving taxes (Cash ETR) while maintaining the level of tax risk (UTB).

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Keywords

Managerial incentives, Executive equity compensation, Corporate tax behavior, Cash ETR persistence

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