This paper analyzes the links between corporate tax avoidance, the growth of highpowered incentives for managers, and the structure of corporate governance. We develop and test a simple model that highlights the role of complementarities between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. The model generates the testable hypothesis that firm governance characteristics determine how incentive compensation changes sheltering decisions. In order to test the model, we construct an empirical measure of corporate tax avoidance - the component of the book-tax gap not attributable to accounting accruals - and investigate the link between this measure of tax avoidance and incentive compensation. We find that, for the full sample of firms, increases in incentive compensation tend to reduce the level of tax sheltering, suggesting a complementary relationship between diversion and sheltering. As predicted by the model, the relationship between incentive compensation and tax sheltering is a function of a firm.s corporate governance. Our results may help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the .undersheltering puzzle,. and why large book-tax gaps are associated with subsequent negative abnormal returns.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2004-09.
Length: 41 pages Date of creation: Apr 2004 Date of revision: Handle: RePEc:uct:uconnp:2004-09
Contact details of provider: Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063 Phone: (860) 486-4889 Fax: (860) 486-4463 Web page: http://www.econ.uconn.edu/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Christian Zimmermann).
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Slemrod, Joel & Yitzhaki, Shlomo, 2002.
"Tax avoidance, evasion, and administration,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470
Elsevier.
[Downloadable!] (restricted)
Other versions:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Mihir A. Desai & Alexander Dyck & Luigi Zingales, 2004.
"Theft and Taxes,"
NBER Working Papers
10978, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Mihir A. Desai & Alexander Dyck & Luigi Zingales, 2003.
"Theft and Taxes,"
International Tax Program Papers
0501, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Dec 2004.
[Downloadable!]