Corporate tax-planning effectiveness: the role of compensation-based incentives.

Accounting Review,  July, 2003  by John D. Phillips

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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 ...