Tax Avoidance in Response to a Decline in the Funding Status of Defined Benefit Pension Plans

Chaudhry, Neeru; Yong, Hue Hwa Au; Veld, Chris

doi:10.2139/ssrn.2585801

Cited by 6 publications

(5 citation statements)

References 37 publications

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“…Richardson, Taylor, and Lanis (2015) documented positive association between financial distress and corporate tax avoidance, signifying that there would be higher incentives to avoid tax during times of financial crisis. Chaudhry, Yong, and Veld (2016) found that fi rms would engage more in tax avoidance when there was a decline in the funding status of pension plans.…”

Section: Introductionmentioning

confidence: 99%

The Determinants and Consequences of Tax Avoidance in Indonesia:the Effects of Top Management Characteristics and Capital Structure

Pangestu

Bimo

2018

saki

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Tax avoidance is the lawful minimization of income tax by employing legal methods. This study aims to assess the effects of top management characteristics and capital structure on tax avoidance, measured with Effective Tax Rate (ETR). Our panel data comprise public manufacturing corporations, observed from 2010-2015 (n= 452). Based on our panel analysis using random effects model on EViews, we find that tax avoidance: (i) is negatively influenced by independent directors (ii) is positively affected by foreign directors; (iii) is influenced by capital structure, measured with firm leverage, and (iv) positively affects current profitability, measured with Return on Equity. Meanwhile, the influence of female directors is found to be nonexistent. We also offer empirical evidence that board of directors' characteristics influence tax avoidance through financing decisions. The findings of this study suggest that firm capital structure determination is motivated by the intention to avoid taxes. SARI PATI Penghindaran pajak adalah minimisasi pajak penghasilan yang sah menurut hukum, dengan menggunakan metode hukum. Penelitian ini bertujuan untuk menilai pengaruh karakteristik manajemen puncak dan struktur modal pada penghindaran pajak, diukur dengan Tarif Pajak Efektif (ETR). Data panel kami terdiri dari perusahaan manufaktur publik, diamati dari 2010-2015 (n = 452). Berdasarkan analisis panel kami menggunakan model efek acak pada eViews, kami menemukan bahwa penghindaran pajak: (i) dipengaruhi secara negatif oleh para direktur independen (ii) dipengaruhi secara positif oleh direktur asing; (iii) dipengaruhi oleh struktur modal, diukur dengan leverage perusahaan, dan (iv) secara positif mempengaruhi profitabilitas saat ini, diukur dengan Return on Equity. Sementara itu, pengaruh direktur perempuan ditemukan tidak ada. Kami juga menawarkan bukti empiris bahwa karakteristik dewan direksi mempengaruhi penghindaran pajak melalui keputusan pendanaan. Temuan penelitian ini menunjukkan bahwa penentuan struktur modal perusahaan dimotivasi oleh niat untuk menghindari pajak.

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Section: Introductionmentioning

confidence: 99%

The Determinants and Consequences of Tax Avoidance in Indonesia:the Effects of Top Management Characteristics and Capital Structure

Pangestu

Bimo

2018

saki

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“…() attribute this reduction in investment to a higher cost of capital that increases as MPC increase. Another strand of literature suggests that firms intentionally underfund their pension plans for various reasons such as to negotiate with employees (Ippolito, ; Benmelech et al., ), avoid takeovers (Asthana, ), and maximize tax benefits (Asthana, ; Shivdasani and Stefanescu, ; Chaudhry et al., ). Shivdasani and Stefanescu () and Cocco and Volpin () note that pension plan sponsoring firms in general are large and profitable with fewer growth opportunities than firms that do not sponsor such pension plans.…”

Section: Introductionmentioning

confidence: 99%

How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

Chaudhry

Yong

Veld

2016

Business Fin & Account

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We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90 th percentile) of pension deficit, investments increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm's target cash level. We repeat our main analysis for the United Kingdom and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.

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“…Several authors examine the impact on firm risk (e.g., Anantharaman and Lee, 2014;Bennett, Guntay & Unal, 2015;Bekkum, 2016). Others investigate how corporate policies of US firms are also influenced by DB pension, for example dividend policy (e.g., Caliskan and Doukas, 2015;Eisdorfer, Giaccotto & White, 2015), cash holdings (Liu, Mauer & Zhang, 2014) and tax policy (e.g., Chi, Huang & Sanchez, 2017;Chaudhry, Yong & Veld, 2017). On the other hand, there is a dearth of studies analyzing the impact of DB pension on corporate policies and firm risk for non-US firms.…”

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confidence: 99%

Do managers act opportunistically towards the end of their career?

Kabir

Veld‐Merkoulova

2018

Journal of International Financial Markets, Institutions and Mo

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As managers approach retirement, their career horizons become shorter and they might start to behave opportunistically by taking a more risk-averse and short-term orientation. Long-term risky investments, such as research and development, can suffer the most from this problem as their payoff comes long after CEOs retire. To mitigate such behavior, most executive compensation contracts include long-term performance incentives. In this study, we hypothesize that long-term debt-like compensation in the form of defined benefit pension can make the career horizon problem more severe. We empirically examine the impact of managerial opportunism, influenced by pension compensation, on the research and development investments. We find that on average UK CEOs do not curtail research and development as their career horizons become shorter. But, the defined-benefit pension component of executive compensation leads CEOs, who are closer to retirement, to decrease R&D investments. Our results imply that executive compensation contracts need to be appropriately adjusted when managers approach retirement.

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Tax Avoidance in Response to a Decline in the Funding Status of Defined Benefit Pension Plans

Cited by 6 publications

References 37 publications

The Determinants and Consequences of Tax Avoidance in Indonesia:the Effects of Top Management Characteristics and Capital Structure

The Determinants and Consequences of Tax Avoidance in Indonesia:the Effects of Top Management Characteristics and Capital Structure

How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?

Do managers act opportunistically towards the end of their career?

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