Posts Tagged ‘incentives’

Governance, Incentives, and Tax Avoidance (SSRN) 

Authors: Chris Armstrong, University of Pennsylvania – Accounting Department; Jennifer L. Blouin, University of Pennsylvania – Accounting Department; Alan D. Jagolinzer, University of Colorado – Leeds School of Business; David F. Larcker; Stanford University – Graduate School of Business
Paper Date: April 17, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 136 

Abstract:      

This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution.

Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.

Which U.S. Market Interactions Affect CEO Pay? Evidence from U.K. Companies (SSRN)
Authors: Joseph Gerakos, University of Chicago – Booth School of Business;  Joseph D. Piotroski ,
Stanford University – Graduate School of Business; Suraj Srinivasan , Harvard Business School
Date: August 2012
Management Science, Forthcoming

Abstract: This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher level of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gap with U.S. firms. Using a sample of CEOs of U.K. firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S. exchange listing is related to higher U.K CEO pay; however, the effect is similar when U.K. firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S. Product market relationships measured by the extent of sales in the U.S. by U.K. companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-U.K. pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm’s non-U.S. foreign market interactions, and the characteristics of the executive. The U.S-U.K. CEO pay gap reduces in U.K. firms that make U.S. acquisitions. Further, the firm’s use of a U.S. compensation consultant increases the sensitivity of U.K. pay practices to U.S. product market relationships.

Keywords: CEO compensation, international pay, globalization, corporate governance, incentives, cross-listing, United Kingdom

New working paper on SSRN:  http://ssrn.com/abstract=1738083
Paper Date: January 2011

Abstract

This paper examines the extent that interactions with US markets impact the compensation practices of non-US firms. Using a sample of large UK companies, we find that the total compensation of UK CEOs is positively related to the extent of the firm’s interactions with US markets, as captured by the percentage of total sales generated in the US, the presence of prior US acquisition activity, the presence of a US exchange listing, and CEO and director-level US board experience. More importantly, we find that exposure to US product markets is associated with the adoption of US-style compensation arrangements (i.e., incentive-based pay packages). In contrast, we find no such association with exposures to other (non-US) foreign product markets.

Together, our evidence is consistent with US market interactions impacting UK compensation practices through two mechanisms: (1) to alleviate internal and external pay disparities arising from the presence of US operations and businesses (proxied by the percent US Sales and prior US acquisitions) and (2) to compensate CEOs for bearing the additional risk and responsibility associated with exposure to foreign securities laws and legal environment (proxied by both US and non-US exchange listings).

Authors

Joseph Gerakos
University of Chicago – Booth School of Business

Joseph D. Piotroski
Stanford University Graduate School of Business

Suraj Srinivasan
Harvard Business School