Equity-based Compensation of Outside Directors and Corporate Tax Avoidance

Date
2019-08-28
Authors
Kao, Wei-Chuan
Liao, Chih-Hsien
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Abstract
This study examines whether outside directors’ equity-based compensation is associated with a firm’s tax avoidance. Using an instrumental variable approach that mitigates the endogeneity concern of director equity incentives, we find that firms paying a higher fraction of their outside director compensation in the form of equity have lower long-run effective tax rate. In addition, the positive effect of outside director equity incentives on tax avoidance is more pronounced in firms adopting a prospector-type business strategy and in firms that are more financially constrained. Overall the findings collectively suggest that equity-based compensation helps motivate outside directors to perform better advising and monitoring so that managers engage in more tax avoidance to maximize shareholder wealth.
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Keywords
Tax avoidance, strategy, outside director, equity-based compensation
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