Corporate tax planning effectiveness: The role of incentives.

摘要

This paper investigates whether compensating operating managers on the basis of after-tax operating-unit accounting results increases firms' tax planning effectiveness. Because a majority of firms do not engage in this practice, this paper further investigates the relation between other tax management practices and firms' effective tax rates (ETRs), the measure of effectiveness used in this study. The simultaneity between firms' ETRs and their use of after-tax operating-manager compensation is modeled and estimated using full-information maximum likelihood (FI/ML).; Using survey data to supplement publicly available data, the results provide evidence that compensating operating managers on the basis of after-tax operating-unit results leads to lower ETRs. There is no evidence of a negative relation between firms' ETRs and other tax management practices investigated in this study. Also, firms using after-tax firm-wide performance measures for both their CEOs and operating managers and firms whose tax professionals report directly to operating-unit personnel are more likely to use after-tax operating-unit performance measures. Finally, multinational firms are more likely to compensate their operating managers using after-tax operating-unit results, while growth firms are less likely to do so.; This study makes the following contributions. First, it provides corporate executives with evidence consistent with the argument that compensating operating managers on the basis of after-tax operating-unit results is a corporate tax “best practice.” In addition, this study is the first large-scale study to investigate how firms motivate managers to engage in tax planning efforts and thus provides future researchers with another potential source of variation in firms' propensities to engage in specific tax planning strategies. This study is also the first to provide empirical evidence concerning the determinants of the firm's decision to use after-tax operating-unit performance measures. Finally, this study presents evidence that a firm's ETR and top management's decision to compensate its operating managers using after-tax operating-unit results is simultaneously determined. Modeling this simultaneity and using FI/ML to estimate a system of equations is crucial to the findings and implications of this study.