Executive cash compensation and tax aggressiveness of Chinese firms

Abstract

We examine the influence of corporate compensation policies on firms' tax aggressiveness in an emerging market where executive compensation is primarily in cash form. Based on a handcollected dataset of 958 firm-year observations of Chinese listed firms for the 2006-2012 period, we find that firms paying higher executive cash compensation are associated with lower tax aggressiveness. This relationship also holds for the excess cash compensation measures which control for executive shareholding, firm profitability, size, growth opportunity, and board independence. We further document that mutual funds ownership pressure firms paying higher compensation to reduce their tax aggressiveness, suggesting adverse selection by mutual funds on firms exhibiting risky tax avoidance activities. High leverage offsets the negative link between cash compensation and tax aggressiveness, indicating a complementary effect between debt and tax avoidance, and, hence, suggesting that creditor monitoring is weak. These results are robust to the system-GMM estimation, which simultaneously account for the endogeneity of executive compensation, tax aggressiveness, ownership and control, leverage, and corporate governance.Our findings on Chinese firms have important policy implications for developing countries around the world with concentrated ownership structure, weak institutional environment, widespread corruption, ineffective rule of law, and ongoing significant social and political transformation. JEL classifications: G3; M4 Arellano M, Bover O (1995) Another look at the instrumental variable estimation of errorcomponents models.

Board of Directors, Audit Committee, Executive Compensation and Tax Avoidance of Banking Companies in Indonesia

“…This strategy can be called tax avoidance. Tax avoidance is often referred to as tax aggressiveness because companies aggressively reduce corporate taxes on income before tax (Huang, Ying, & Shen, 2018). Companies' tendency to minimize tax payments is based on the same benefits received from the government, both paying large and small amounts of tax (Huda, 2016).…”

“…Meanwhile, for research related to executive compensation on corporate tax avoidance, there are differences in each study's results. The study of Huang et al (2018) revealed that if companies pay higher compensation money to executives, tax avoidance will be lower for companies registered in China. Gorry, Hassett, Hubbard, and Mathur (2015) report their empirical findings that there is a significant impact on taxes due to executive compensation.…”

“…Due to differences in findings with the same research concept, the authors conducted another study related to the board of directors' size, the size of the audit committee, executive compensation, and tax avoidance in banks listed on the IDX 2014-2018. Further research in other countries to create international arrangements on this matter need to be conducted, as suggested by Huang et al (2018). The reason for making banking companies listed on the IDX the target of research is many tax avoidance cases in banks even though they are supervised by several parties such as the DGT, BI, and OJK.…”

“…Research by Huang et al (2018) argued that the tax aggressiveness was low if the executive received high compensation. Still, on the contrary, if the executive's compensation was inadequate, the tax aggressiveness was high.…”

A responsabilidade social corporativa afeta a agressividade fiscal das firmas? Evidências do mercado acionário brasileiro

“…A maximização dos lucros (Mills, Erickson, & Maydew, 1998;Santana, 2014;Blaufus, Mohlmann, & Schwäbe, 2019), o aumento da remuneração dos gestores (Rego & Wilson, 2012;Wahab & Holland, 2012;Gaertner, 2014;Gul, Khedmati, & Shams, 2018;Huang, Ying, & Shen, 2018) e a busca por sistemas tributários mais simples (Elali, 2009) são apontados na literatura como fatores motivacionais para realização da prática.…”