Equity-based Compensation of Outside Directors and Corporate Tax Avoidance

• Published in: 管理學報 2021-06, Vol.38 (2), p.231-256
• Main Authors: 高偉娟(Wei-Chuan Kao), 廖芝嫻(Chih-Hsien Liao)
• Format: Article
• Language: English
• ISSN: 2521-4306
• DOI: 10.6504/JMBR.202106_38(2).0004

This study examines whether outside directors' equity-based compensation is associated with a firm's tax avoidance. Using an instrumental variable approach that mitigates the endogeneity concern of director equity incentives, we find that firms paying a higher fraction of their outside director compensation in the form of equity have lower long-run effective tax rates. In addition, the positive effect of outside director equity incentives on tax avoidance is more pronounced in firms adopting a defender-type business strategy and in firms that are more financially constrained. Overall, the findings collectively suggest that equity-based compensation helps motivate outside directors to provide better advising and monitoring so that managers engage in more tax avoidance to maximize shareholder wealth.