CEO Severance Pay and Corporate Tax Avoidance

• In Event: Taxes: Tax Avoidance and ETRs

Abstract

We examine the association between CEO severance pay (i.e., payment the CEO would receive if s/he is involuntarily terminated) and corporate tax avoidance. We find that corporate tax avoidance is increasing in the amount of CEO severance pay. This finding is consistent with the notion that CEO severance pay encourages otherwise risk averse managers to take reasonable amounts of risk and, thus, fits into the optimal executive incentive scheme as a form of efficient contracting. Further analysis reveals that the association between CEO severance pay and corporate tax avoidance is stronger in situations where we expect the risk-taking incentives provided by severance pay to matter more – when the CEO is otherwise more risk averse and when firms exhibit a higher business risk. Overall, our findings suggest that firms can contract with their managers using CEO severance pay to provide incentives for them to engage in tax avoidance activities.

Authors

• John L. Campbell, University of Georgia

• Xinjiao Guan, National University of Singapore

• Oliver Zhen Li, National University of Singapore

• Zhen Zheng, National University of Singapore