CEO Inside Debt Incentives and Corporate Tax Sheltering

Posted: 13 Nov 2017

See all articles by Sabrina Chi

Sabrina Chi

CSU Fullerton

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Juan Manuel Sanchez

University of Texas at San Antonio

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Date Written: September 1, 2017

Abstract

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk-appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash-out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt-like compensation for corporate tax policies.

Keywords: inside debt; deferred compensation; incentives; executive com-pensation; tax sheltering; tax shelters

JEL Classification: H25; H26; M41; M52

Suggested Citation

Chi, Sabrina and Huang, Shawn X. and Sanchez, Juan Manuel, CEO Inside Debt Incentives and Corporate Tax Sheltering (September 1, 2017). Journal of Accounting Research, Vol. 55, No. 4, 2017, Available at SSRN: https://ssrn.com/abstract=3068877

Sabrina Chi

CSU Fullerton ( email )

Fullerton, CA
United States

Shawn X. Huang (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Juan Manuel Sanchez

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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