Equity Risk Incentives and Corporate Tax Aggressiveness |
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| Authors: | SONJA OLHOFT REGO RYAN WILSON |
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| Institution: | 1. Indiana University;2. University of Iowa. All data are available from public sources. We thank Merle Erickson (the editor) and the anonymous referee for their helpful suggestions. We also thank Alan Jagolinzer (our discussant at the 2009 UNC Tax Symposium), Dan Amiram, Brad Blaylock, Jennifer Brown, Dan Collins, Cristi Gleason, Sanjay Gupta, Leslie Hodder, Paul Hribar, Steve Kachelmeier, Stacie Laplante, Sean McGuire, Rick Mergenthaler, Lillian Mills, Tom Omer, John Robinson, Terry Shevlin, Connie Weaver, and workshop participants at Arizona State University, Indiana University, Texas A&M University, the University of Iowa, the University of Texas, and the 2009 UNC Tax Symposium for helpful comments on earlier versions of this paper. We also appreciate comments from the University of Washington tax readings group. |
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| Abstract: | This study examines equity risk incentives as one determinant of corporate tax aggressiveness. Prior research finds that equity risk incentives motivate managers to make risky investment and financing decisions, since risky activities increase stock return volatility and the value of stock option portfolios. Aggressive tax strategies involve significant uncertainty and can impose costs on both firms and managers. As a result, managers must be incentivized to engage in risky tax avoidance that is expected to generate net benefits for the firm and its shareholders. We predict that equity risk incentives motivate managers to undertake risky tax strategies. Consistent with this prediction, we find that larger equity risk incentives are associated with greater tax risk and the magnitude of this effect is economically significant. Our results are robust across four measures of tax risk, but do not vary across several proxies for strength of corporate governance. We conclude that equity risk incentives are a significant determinant of corporate tax aggressiveness. |
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