Corporate Tax-Planning Effectiveness: The Role of Compensation-Based Incentives
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- 1 July 2003
- journal article
- Published by American Accounting Association in The Accounting Review
- Vol. 78 (3) , 847-874
- https://doi.org/10.2308/accr.2003.78.3.847
Abstract
This study investigates whether compensating chief executive officers and business-unit managers using after-tax accounting-based performance measures leads to lower effective tax rates, the empirical surrogate used for tax-planning effectiveness. Utilizing proprietary compensation data obtained in a survey of corporate executives, the relation between effective tax rates and after-tax performance measures is modeled and estimated using a two-step approach that corrects for the endogeneity bias associated with firms' decisions to compensate managers on a pre- versus after-tax basis. The results are consistent with the hypothesis that compensating business-unit managers, but not chief executive officers, on an after-tax basis leads to lower effective tax rates.Keywords
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