PAY FOR TAX PERFORMANCE AND ITS EFFECT ON TAX AVOIDANCE AND FIRM CREDIT RATING

10.6293/AQAFA.202212_(19).0003

Hanni Liu；Jennifer Yin

Executive Compensation ； Tax Avoidance ； Shareholder-Debtholder Conflicts ； Credit Rating

Advances in Quantitative Analysis of Finance and Accounting

19期（2022 / 12 / 31）

65 - 102

英文

An evaluation of the incentives for including tax planning in chief executive officer compensation contracts shows that the compensation weight placed on tax performance is positively associated with the level of corporate tax avoidance. The research also reveals that the compensation weight placed on tax performance is negatively associated with a firm's credit rating, which suggests that credit-rating agencies use tax-minimization incentives in executive compensation contracts, in addition to actual tax outcomes, to set credit ratings. In addition, our study shows that compensation committees reduce such incentives only when the cost of a potential credit downgrade is high. Firms on the edge of getting downgraded from an investment grade to a speculative grade (i.e., firms with BBB- rating) lower the incentive weight placed on tax minimization. No such evidence exists for firms that are not at risk of a downgrade to speculative grade. Further, the research demonstrates that good corporate governance can mitigate the negative impact of compensation incentives for tax minimization on credit rating.

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