CEOs with short-term equity incentives behave myopically out of concern for the stock price. We argue that corporate tax avoidance provides an avenue for managerial short-termism due to its immediate positive impact on stock prices. We show that vesting equity delta—a measure of short-term equity incentives—is associated with declines in cash effective tax rates. We also identify CEO equity sales as the underlying economic mechanism. Additional analyses indicate that vesting equity induces ineffective tax avoidance, which is positively (negatively) associated with short-term (long-term) shareholder wealth. We address endogeneity concerns by using vesting schedules determined several years prior and options acceleration before the adoption of FAS 123R as events plausibly exogenous to the current corporate tax avoidance environment.
Gkikopoulos et al. (Mon,) studied this question.