Equity Incentives and Tax-Motivated Income Shifting

ABSTRACT We examine whether executives’ equity-based compensation incentives, tied to firm value (delta) and risk-taking (vega), are associated with the extent of firms’ tax-motivated income shifting. Managers of multinational firms face unique value and risk incentives. However, it is unclear whether these incentives are associated with income shifting, a strategic tax planning activity that reflects intentional managerial behavior along both operational and accounting dimensions. We find that delta is positively associated with income shifting, suggesting that executives behave as if income shifting is associated with value enhancing decisions. We fail to find an association between vega and income shifting, on average, but find a positive association when corporate governance is relatively weak. These findings suggest that executives behave as if the value enhancing benefits of income shifting dominate potential increases in risk. Our findings suggest that the relation between executive incentives and income shifting is distinct from overall tax avoidance. Data Availability: All data used in this study are publicly available. Wharton Research Data Services (WRDS) was used in preparing this manuscript. This service and the data available thereon constitute valuable intellectual property and trade secrets of WRDS and/or its third-party suppliers. JEL Classifications: G34; H25; H26; J33; M12; M41; M52.