Abstract
This paper investigates how corporate governance plays a role in long-run tax management and contributes to the existing literature in several ways. First, we add insight into the horizon problems related to executive and director compensation and show that incentive compensation provides long-term incentives to improve performance by establishing a link between higher pay-performance sensitivity and lower taxes. Second, this is one of the first papers, to our knowledge, to empirically examine the role of governance in corporate tax management from a long-term perspective in order to better understand the lasting effects of governance. We find that incentive compensation drives managers to make investments into longer-horizon pay outs such as tax management. Furthermore, we find that this investment into tax management benefits shareholders; better tax management is positively related to higher returns to shareholders. We also address the endogeneity issues of corporate governance and performance measures. Finally, our paper is unique in examining which type of tax management strategy (domestic or foreign) different firms focus on. Our results shed light into how governance can improve firm performance and increase shareholder value in the long run.
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