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Compensation in the Post†FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty

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  • Jennifer L. Brown
  • Katharine D. Drake
  • Melissa A. Martin

Abstract

Academic and anecdotal evidence indicates that incentive systems often provide short†term payouts without regard for long†term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance†based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post†FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre†FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post†FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post†FIN No. 48 period.

Suggested Citation

  • Jennifer L. Brown & Katharine D. Drake & Melissa A. Martin, 2016. "Compensation in the Post†FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 121-151, March.
    • Handle: RePEc:wly:coacre:v:33:y:2016:i:1:p:121-151
    DOI: 10.1111/1911-3846.12152
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    Cited by:

    1. Stephannie A. Larocque & Melissa A. Martin & Beverly R. Walther, 2020. "Are Earnings Forecasts Informed by Proxy Statement Compensation Disclosures?†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 741-772, June.
    2. Argilés-Bosch, Josep Mª & Ravenda, Diego & Garcia-Blandón, Josep, 2021. "E-commerce and labour tax avoidance," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 81(C).
    3. Arfah Habib Saragih & Syaiful Ali, 2023. "Corporate tax risk: a literature review and future research directions," Management Review Quarterly, Springer, vol. 73(2), pages 527-577, June.
    4. Argilés-Bosch, Josep M. & Somoza, Antonio & Ravenda, Diego & García-Blandón, Josep, 2020. "An empirical examination of the influence of e-commerce on tax avoidance in Europe," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 41(C).
    5. Ekici, Emrah & Ruseva, Marina Y., 2022. "Do stock options and stock awards provide managers different incentives for corporate disclosure?," Advances in accounting, Elsevier, vol. 59(C).
    6. Katharine D. Drake & Ellen Engel & Melissa A. Martin, 2023. "Investigating discretion in executive contracting: extracting private information from valuation allowance decisions," Review of Accounting Studies, Springer, vol. 28(2), pages 533-569, June.
    7. Yoojin Shin & Jung-Mi Park, 2023. "The Effect of a Company’s Sustainable Competitive Advantage on Their Tax Avoidance Strategy—Focusing on Market Competition in Korea," Sustainability, MDPI, vol. 15(10), pages 1-15, May.
    8. Huang, Wenxuan & Xu, Weidong & Gao, Xin & Li, Donghui & Fu, Wentao, 2023. "Terrorist attacks and CEO compensation: UK evidence," Research in International Business and Finance, Elsevier, vol. 64(C).
    9. Guanming He & Helen Mengbing Ren & Richard Taffler, 2020. "The impact of corporate tax avoidance on analyst coverage and forecasts," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 447-477, February.

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