CEO Inside Debt Incentives and Corporate Tax Policy

Abstract

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax avoidance. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory suggests that inside debt holdings negatively impact CEO risk-appetite. To the extent that aggressive tax policies involve significant cash flow shortfalls, high cash flow volatility, and losses in firm and CEO reputation in the future, we expect that inside debt holdings will curb CEOs from engaging in risky tax strategies. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax avoidance. Overall, our results highlight the importance of investigating the implication of CEO debt-like compensation for firm tax policies.