Managerial Ownership and Tax Planning: Evidence
from Stock Ownership Plans
Jaewoo Kim
University of Rochester
Phillip Quinn
University of Washington
Ryan Wilson
University of Oregon
April 2016
Abstract: Prior work examines and finds that a variety of ownership structures are associated with
corporate tax avoidance (e.g., family ownership, private equity ownership, and dual-class ownership).
Although diffuse ownership is a prevalent ownership structure of the U.S. public firms, there is limited
evidence on the relation between managerial ownership and tax avoidance among firms with diffuse
ownership. We address this question in two ways. First, we examine a set of firms with diffuse ownership
for which boards of directors adopt target ownership plans. Using a difference-in-difference design for
3,321 firm-years, we find firms that adopt stock ownership plans that require increased managerial
ownership are associated with lower cash effective tax rates following plan adoption relative to
propensity-matched control firms. Firms that adopt plans that only constrain managerial selling, however,
are not associated with lower cash effective tax rates following adoption. Our findings are consistent with
improved incentive alignment between managers and shareholders leading to increased tax avoidance.
* Jaewoo Kim is an Assistant Professor at the Simon Graduate School of Business at the University of Rochester
and may be reached at jaewoo.kim@simon.rochester.edu. Phil Quinn is an Assistant Professor at Foster School of
Business at the University of Washington and may be reached at philq@uw.edu. Ryan Wilson is an Associate
Professor at the Lundquist College of Business at the University of Oregon and may be reached at
rwilson3@uoregon.edu. We appreciate helpful comments from TJ Atwood, Terrence Blackburn, Asher Curtis,
Jeffrey Hoopes (ATA Discussant), Patrick Hopkins, Dan Lynch, Jodi Permenter, Sarah Shaikh, Jonathan Shipman,
Brian Williams, and workshop participants at the University of Arkansas, and the 2016 ATA Midyear Meeting. The
authors gratefully acknowledge the generous financial support from their respective institutions.
1. Introduction
In this paper we examine the effects of managerial ownership on corporate tax avoidance
by focusing on public firms with diffuse ownership. Although previous research on tax
avoidance examines and finds that various forms of corporate ownership structures are
associated with corporate tax avoidance (e.g., family ownership (Chen et al. 2010), private equity
ownership (Badertscher et al. 2013), and dual-class ownership (McGuire et al. 2014)), there is
limited evidence on how managerial ownership is associated with tax avoidance amongst the U.S.
public firms with diffuse ownership. Given that diffuse ownership is a dominant ownership
structure of the U.S. public firms, our paper enhances our understanding of the nature of the
relation between corporate ownership and tax avoidance.
Studying the impact of managerial ownership on tax avoidance presents significant
obstacles. Managerial ownership is likely endogenous to a variety of corporate policies including
tax planning strategy as well as unobservable firm characteristics such as growth opportunities.
To mitigate this issue, we follow Core and Larcker (2002) and examine a set of firms with
diffuse ownership where boards of directors adopt target ownership plans when firms have a
misalignment between managers and shareholders.1 Studying the adoption of stock ownership
plans is advantageous relative to studying the level of managerial ownership or voluntary
changes in ownership because managers could increase ownership levels in anticipation of
improved performance, part of which may result from more effective tax planning. The adoption
of a stock ownership plan will induce increases in managerial ownership that are unlikely to be
related to changes in executive expectations about future firm performance (Core and Larcker
2002).
1
Core and Larcker (2002) find accounting returns are significantly higher in the two years following plan adoption
and excess returns are significantly higher in the first six months in the year the plan is adopted.
1
Target ownership plans mandate that executives obtain a certain level of stock ownership
within a given period of time, most often five years. The required level of ownership typically
varies by executive, with plans most often requiring CEOs to own five times their annual salary
and requiring other named executive officers to own two to three times their annual salary.
Consequently, studying a sample of firms that adopt target stock ownership plans enables us to
directly identify the remediation of agency problems (pre-adoption versus post-adoption of stock
ownership plan) between managers and shareholders, and its impact on tax avoidance activities.
The use of our setting is advantageous because the relation between managerial ownership and
incentive alignment between managers and shareholders can be nonlinear (e.g., Himmelberg et al.
1999).
The literature on tax avoidance has conflicting views on the nature of the relation
between agency conflicts and tax avoidance. Armstrong et al. (2015) articulate a traditional view
of the role of governance on tax avoidance. Under this traditional view, tax avoidance is a risky
investment opportunity and unresolved agency conflicts can result in managers choosing a
suboptimal level of tax avoidance. Empirical studies provide evidence consistent with this view
(e.g., Rego and Wilson 2012), which we refer to as the incentive alignment hypothesis. In
contrast to the traditional view of agency costs, Desai and Dharmapala (2006) argue that tax
avoidance can be the outcome of agency conflicts between managers and shareholders. The
authors posit that self-interested managers engage in aggressive tax planning to hide managerial
diversion of corporate resources. Desai and Dharmapala (2006) predict a negative association
between managerial incentives and aggressive tax planning, and we refer to their hypothesis as
the rent extraction hypothesis. We build on Core and Larcker (2002), who document stock
ownership plans improve incentive alignment between managers and outsider shareholders, and
2
we examine how the improvement in incentive alignment from ownership plans affects managers’
tax avoidance activities. Given the competing explanations of Armstrong et al. (2015) and Desai
and Dharmapala (2006), it is unclear ex ante whether the increase in managerial ownership from
the target ownership plans will lead to more or less tax avoidance.
We begin our analysis by splitting adoption firms into two groups according to whether
the stock ownership plan required an increase in ownership for at least one executive or required
no executive to increase stock ownership. We measure the level of tax avoidance using the cash
effective tax rate. Unlike the traditional GAAP effective tax rate, the cash effective tax rate is not
biased by changes in tax accounting accruals and reflects tax avoidance activities related to the
deferral of cash tax payments (Dyreng et al. 2008). When examining firms adopting target
ownership plans that require an increase in managerial ownership, we observe an increase in the
level of tax avoidance subsequent to plan adoption. For firms that adopt ownership plans not
requiring additional managerial ownership, we observe no change in the level of tax avoidance.
Next, we use the increase required and no increase required firms to implement a difference-indifferences design, and we control for known determinants of tax planning. Consistent with the
incentive alignment hypothesis, we find the adoption firms that required at least one executive to
increase stock ownership experience a 2.1 percentage point decrease in their cash ETR from the
pre- to post-adoption period relative to adoption firms that do not require any executives to
increase ownership. The 2.1 percentage point decrease represents an economically significant
decrease of 8.0 percent of the pre-adoption cash effective tax rate of firms that require an
increase in ownership.
We also examine the sustainability of the observed increase in tax avoidance by
examining ten-year cash effective tax rates following the adoption of target ownership plans.
3
Similar to our primary tests of cash effective tax rates over the four years before and after plan
adoptions, we find the ten-year rates decline significantly following the adoption of the
ownership plans requiring an increase in stock ownership. The reduced ten-year rates suggest the
increased tax planning following plan adoption is a result of implementing sustainable tax
strategies and not a reflection of managers implementing aggressive strategies that are later
reversed upon examination. Overall, these findings are consistent with improved incentive
alignment post-adoption leading managers to put more effort into tax planning resulting in
increased tax avoidance.
Next, we compare changes in tax avoidance activity for firms that adopt stock ownership
plans for their named executive officers relative to a set of control firms. We use propensityscore matching to select control firms that exhibit similar likelihoods of adoption to our sample
of adoption firms, but that did not actually adopt stock ownership plans. To isolate the effects of
plan adoption, we use our treatment and control firms to implement an alternative difference-indifferences design. Again consistent with the incentive alignment hypothesis, we document that
adoption firms decrease their cash effective tax rates by 2.4 percent, on average, from the pre-to
post-adoption period relative to the matched control firms. Consistent with our primary analysis,
we find this decrease is concentrated in the adoption firms requiring an increase in stock
ownership. A 2.4 percent decrease in cash effective tax rates translates to an average cash
savings of $20 thousand per executive team. Of course, the potential benefits of reduced tax rates
to executives are likely greater than their portion of the tax savings based on their ownership. For
example, executive bonuses may be a function of after-tax earnings.
We conduct additional tests to rule out alternative explanations for our findings and to
provide further corroborating evidence. First, we note that the firms adopting ownership plans
4
exhibit higher average cash effective tax rates prior to adoption than the propensity matched
control firms. The higher cash effective tax rates raise the concern that our analysis is simply
capturing a mean-reversion of cash effective tax rates. To mitigate this concern, we repeat our
analysis by examining the four years before and after a false adoption date set four years prior to
the actual adoption. The intuition underlying this test is that if changes in cash effective tax rates
around the adoption of stock ownership are attributable to the mean-reversion, such a relation is
likely a general pattern of the data, and thus should be observed in other time periods. We find
no evidence of an increase in tax avoidance in the falsification test, which suggests our results
are not an artifact of mean-reversion of cash effective tax rates. This test also provides evidence
that the zero correlation, or parallel trends, assumption is not violated in our setting.2 Second, we
include covariates from our propensity-score matching procedure to control for imbalance
between treatment and control firms on variables affecting the likelihood of adoption, and we
continue to find evidence of a statistically, and economically, significant decrease in cash
effective tax rates for adoption firms that require an increase in ownership.
A recent but growing literature examines the impact of agency conflicts on tax
avoidance. Despite numerous recent studies in this area, the literature provides little insight into
how managerial ownership influences tax avoidance for the majority of firms with diffuse
ownership structures. Existing work in this area can be split into two separate lines of research.
One line of research examines the association between various corporate governance structures
(including equity compensation) and tax avoidance (Desai and Dharmapala 2006; Rego and
Wilson 2012; Armstrong et al. 2012; and Armstrong et al. 2015). The other line of research
investigates the impact of various ownership structures including family ownership (Chen et al.
2
The zero correlation assumption is an identifying assumption for the difference-in-differences estimators, and the
zero correlation assumption states that in the absence of the treatment, the change in cash effective tax rates would
have been the same between treatment and control groups.
5
2010), private equity ownership (Badertscher et al. 2013), and dual-class ownership (McGuire et
al. 2014) on tax avoidance decisions. The studies examining the association between equity
compensation and tax decisions provide mixed results 3 and the studies examining ownership
structure focus on settings with unique agency concerns (e.g. family ownership or dual class
stock). The differences-in-differences approach we employ in this study increases our confidence
in drawing inferences on the relation between ownership structure and tax reporting policy.4 In
doing so, the study complements and extends existing work on the relationship between stock
ownership and tax avoidance in the cross-section of firms.
The remainder of the paper is organized as follows. The next section develops the
competing hypotheses. Section 3 describes sample selection procedures and provides descriptive
statistics. Section 4 presents the empirical methods and results. Section 5 provides additional
analysis, and Section 6 concludes.
2. Literature Review and Hypothesis Development
2.1 Literature review
A growing line of research investigates the impact of various ownership structures on tax
avoidance. Little evidence exists, however, on how manager-shareholder agency conflicts in
diffuse-ownership firms affect tax avoidance. Rego and Wilson (2012) is among the few studies
examining the effect of executives’ equity holdings on tax planning activity. Specifically, they
examine the association between executives’ equity risk incentives and the amount of firms’
3
Desai and Dharmapala (2006) find a negative association between equity incentives and tax sheltering among
poorly governed firms. Rego and Wilson (2012) and Gaertner (2014) find a positive association between option
vega and measures of tax aggressiveness. Armstrong et al. (2012) do not find an association between CEO variable
compensation (including stock and options) and tax avoidance. We discuss these studies in more detail in Section 2.
4
We note that the adoption of the ownership plans is a decision made by the board of directors. Similar to Core and
Larcker (2002), the goal of our study is not to address concerns about endogeneity, but rather to examine changes in
corporate behavior around a setting in which boards re-contract with managers.
6
risky tax avoidance. Building on existing research in finance and accounting, they predict top
executives’ appetite for risk will increase with equity risk incentives, which will lead to an
increased willingness to engage in risky tax avoidance. Consistent with this prediction, they find
a positive association between equity risk incentives of CFOs and CEOs and tax avoidance
activity. In contrast, Desai and Dharmapala (2006) argue that tax avoidance can be the outcome
of manager-shareholder agency conflicts. From this perspective, self-interested managers engage
in aggressive tax planning to hide managerial diversion of corporate resources. Thus, they
predict a negative association between managerial incentives and aggressive tax planning and
provide evidence consistent with their prediction. Consequently, the exact nature of the relation
between managerial equity incentives and tax avoidance remains unclear.
Armstrong et al. (2015) offer an alternative view on tax avoidance. They maintain that
tax avoidance is a risky investment project and unresolved agency conflicts between managers
and shareholders result in suboptimal tax avoidance activities. Unlike Rego and Wilson (2012)
and Desai and Dharmapala (2006), they predict that suboptimal tax avoidance can result in either
“too little” or “too much” tax avoidance, and thus better corporate governance reduces “too
extreme” tax avoidance in both directions. Consistent with this prediction, Armstrong et al.
(2015) report a negative (positive) association between governance mechanisms and tax
avoidance for firms with high (low) levels of tax avoidance.
Although Armstrong et al. (2015) advance our understanding of the nature of the relation
between tax avoidance and agency concerns, they do not directly speak to the association
between the separation of ownership and control and tax avoidance. Understanding the nature of
the relation between managerial equity ownership and tax avoidance is important, because the
separation of ownership and control is a root cause of agency conflicts between shareholders and
7
managers (Jensen and Meckling 1976). This paper provides direct evidence on how the degree of
the separation of ownership and control is associated with levels of corporate tax avoidance.
Prior work examines the relation between various ownership structures and corporate tax
avoidance (e.g., family ownership (Chen et al. 2010), private equity ownership (Badertscher et al.
2013), and dual-class ownership (McGuire et al. 2014)), but none of these existing studies
directly examine the effects of the separation of ownership and control faced by most firms. The
nature of agency conflicts among family firms, firms with dual-class shares, or firms with private
equity ownership differs from the agency conflicts between managers and diffuse shareholders
(Bebchuk and Weisback 2010). For example, the time horizon of the controlling shareholders in
family firms or dual-class firms is much longer than that of managers in firms with diffuse
ownership. If rent extraction activities decrease a firm’s long-term value, the longer time horizon
possibly incentivizes the controlling shareholders not to engage in tax avoidance as a way of
extracting rents from the minority shareholders (i.e., they prefer a “quiet life”). In contrast, it is
possible the shorter time horizon of managers among firms with diffuse ownership incentivizes
them to engage in tax avoidance as a way of extracting rents from diffuse shareholders, because
it is difficult for shareholders to recoup wealth expropriation ex post from managers (Shleifer
and Vishny 1997). The above discussion suggests that it is difficult to generalize findings of
studies examining the impact of “unique” ownership structures on tax avoidance to firms with
diffuse ownership. Our contribution to the literature is to provide evidence on the effects of the
agency conflicts between managers and shareholders among firms with diffuse ownership on tax
avoidance.
2.2. Hypotheses development
8
To understand the relation between separation of ownership and control and tax
avoidance, we study the adoption of stock ownership plans. Boards of directors adopt stock
ownership plans, which specify a minimum amount of stock that must be owned by executives
within a minimum amount of time. Core and Larcker (2002) document that boards adopt
ownership plans when managerial ownership is low relative to industry averages. The authors
then document evidence consistent with the increase in ownership following adoption mitigating
manager-shareholder agency conflicts.
This research setting has several advantages relative to studying the level of managerial
ownership or voluntary changes in ownership. First, studying ownership plans mitigates the
possibility that managers increase ownership levels in anticipation of improvements in stock
price performance, because improvements in stock performance may be associated with
corporate tax avoidance. Second, our research setting allows us to directly examine the impact of
the remediation of agency problems (pre-adoption versus post-adoption of target ownership plan)
between managers and shareholders on tax avoidance activities. Finally, this approach also
allows us to perform inter-temporal analyses so as to mitigate concerns of an endogenous
relation between managerial ownership structure and tax avoidance, which potentially arises in
cross-sectional research settings.5
It is ex ante unclear whether increases in managerial ownership result in more or less tax
avoidance. The extant theory of corporate tax avoidance provides two opposing predictions
about the impact of increases in managerial ownership on tax avoidance. Under the traditional
view that managers engage in risky tax avoidance activities in an attempt to maximize
shareholders’ value by diverting resources from the government to shareholders, increasing
5
This concern is particularly important when examining the relation between ownership and tax avoidance, because
the relation between managerial equity ownership and agency conflicts is concave (McConnell and Servaes 1990).
9
managerial ownership results in more aggressive tax avoidance (e.g., Rego and Wilson 2012). In
other words, as agency conflicts decrease from pre- to post-adoption period, managers are likely
to engage in more aggressive level of tax avoidance in the interests of themselves and
shareholders. We refer to this hypothesis as the incentive alignment hypothesis. In contrast,
Desai and Dharmapala (2006) posit that managers can structure complex tax avoidance
transactions in a bid to extract rents from shareholders. Under this alternative view, increasing
managerial ownership results in less aggressive tax avoidance. Stated differently, as agency
conflicts decrease post-adoption, managers are likely to engage in less tax avoidance. We refer to
this competing hypothesis as the rent extraction hypothesis.
3. Sample Selection
We hand-collect a sample of stock ownership plan adoptions that spans from 1993 to
2013. This sample extends the sample used by Quinn (2015). Starting with a sample of S&P
1500 firms as of January 1, 1995, we identify firms that adopt stock ownership plans using a
Python script that searches EDGAR filings for “ownership plan”.6 We also classify adoption
firms into two groups depending upon whether the stock ownership plan requires an increase in
ownership for at least one named executive officer.7 We refer to the former as the increaserequired sample and the latter as the no-action-required sample, and we use the no-actionrequired sample as a control sample against which we benchmark the increase-required sample.
We obtain financial statement information from Compustat, managerial ownership data from
Execucomp, and governance data from Institutional Shareholder Services. Stock return data
6
To eliminate false positive matches, we hand check each firm’s first match to ensure that plan is a stock ownership
plan for executives, rather than a plan for directors or non-executive employees. To eliminate false negative matches,
we check the proxy statement prior to the first match. For non-adoption firms, we read the most recent proxy to
verify the firm is a non-adoption firm.
7
Companies most commonly report five named executive officers, but some firms report more.
10
come from CRSP. Figure 1 shows the frequency of adoption firms separately for the increaserequired and no-action-required subsamples. We observe some variation in the number of firms
that adopted the stock ownership plans over time. We find, though, that patterns are similar
between the increase-required and no-action-required subgroups.
A natural question regarding stock ownership plans is whether managers actually
increase their ownership to meet plan guidelines, and a potential concern with examining stock
ownership plans is that the requirements may be disregarded by managers. Core and Larcker
(2002) report that for their sample of firms that adopt stock ownership plans, managerial
ownership increases in the two years following the plan adoption.8 Quinn (2015) focuses on a
randomly-selected subset of 50 firms that adopt plans that require an increase in managerial
ownership for one or more executives. Quinn (2015) then hand-collects ownership data for each
of the named executive officers over the five years subsequent to adoption, and he finds evidence
consistent with managers following plan requirements. 9 For our sample of adoptions, the
maximum CEO ownership multiple is 25, and the maximum multiple for a non-CEO is 10. The
most common CEO ownership multiple is five, and the most common non-CEO ownership
multiple is three. Consistent with the survey of Ayco (2012), the multiple for the CEO is
typically much higher than the multiple for other named executive officers in our sample.
4. Empirical Approach
8
Core and Larcker (2002) do not distinguish between firms that require one or more executives to increase their
ownership and firms that require no increase in ownership.
9
Specifically, Quinn (2015) collects data for 255 executives, and finds 251 executives were in compliance by the
five-year window or had left the firm. Of the four executives that were not in compliance within five years, the first
executive was in compliance during the sixth year, the second executive retired in the sixth year, the third executive
was at a firm that was acquired during the sixth year and stopped filing proxy statements, and the fourth executive
was promoted to CEO during the five-year window, which increased his ownership level. We extend the verification
of compliance process of Quinn (2015) by sampling an additional 10 firms, and our sample provides evidence that
managers indeed increase their ownership to meet plan requirements.
11
To test whether tax avoidance changes from the pre- to post-adoption period, we employ
several research designs that complement each other. The alternative designs employed in this
paper are concerned primarily with how to select counterfactuals. Counterfactuals play a critical
role in drawing inferences in non-random observational studies. In this section, we explain our
research designs and discuss the merits and limitations of each design.
4.1. Using firms that adopted stock ownership plans that required no named executive officer to
increase their stock ownership as control firms
In our primary research design, we focus on firms that adopt stock ownership plans. We
then use firms that adopted stock ownership plans that required no named executive officer to
increase their stock ownership as control firms (i.e., the no-action-required sample) as control
firms. The treatment firms are those that adopted stock ownership plans that required at least one
named executive officer to increase stock ownership (i.e., the increase-required sample). Thus,
we compare the differential shift in tax planning between the two subsamples around the
adoption of stock ownership plans. Specifically, we estimate the following equation:
𝐶𝐸𝑇𝑅%,' = 𝛽* 𝑇𝑅𝐸𝐴𝑇%,' + 𝛽- 𝑃𝑂𝑆𝑇%,' + 𝛽1 𝑇𝑅𝐸𝐴𝑇%,' ∗ 𝑃𝑂𝑆𝑇%,' +
𝜃 ∗ 𝐶𝑂𝑁𝑇𝑅𝑂𝐿%,' + 𝜀%,'
(1)
where CETR is the firm-year cash effective tax rate with pretax income adjusted for special
items.10 While CETR is a common measure of tax planning, Hanlon and Heitzman (2010) note
that several measures of tax planning exist, and the authors also emphasize that the appropriate
measure of tax planning depends on the setting. In our setting, we posit that managers increase
firm value through improved tax planning subsequent to the adoption of stock ownership plans.
10
Following Dyreng et al. (2008), we adjust for special items to remove the effect of GAAP only items, such as
goodwill write-downs, that do not affect taxes. Our results are qualitatively similar when we do not adjust cash
effective tax rates for special items.
12
Reducing cash paid to tax authorities through tax planning directly increases cash flows available
to the firm.11
TREAT is an indicator variable that equals one for the adoption firms that required an
increase in ownership for at least one named executive, and zero for the adoption firms that
require an increase in ownership for none of the named executive officers. POST is an indicator
variable that equals one (zero) for firm-years that occur (before) after a plan adoption. The preadoption and post-adoption period include four years each. The pre-adoption period encompasses
the three years prior to plan adoption and the year of adoption, and the post-adoption period
encompasses four years following a plan adoption.12 Our independent variable of interest is the
interaction between TREAT and POST, and the coefficient estimate on the interaction represents
the average treatment effect for adoption firms that required an increase in ownership for at least
one executive. Under the incentive alignment hypothesis (rent extraction hypothesis), the
coefficient estimate on the interaction between TREAT and POST should be negative (positive),
consistent with more (less) tax planning subsequent to plan adoption.
We also control for potential determinants of cash effective tax rates. We control for pretax profitability (PT_ROA), which we compute as pre-tax income divided by average total assets.
We control for the extent of net operating losses, which we compute as tax loss carry forwards
11
We use a one-year measure of cash ETR. Hanlon and Heitzman (2010) note that the one-year cash ETR measure
is more volatile than one-year GAAP ETR and one-year current ETR measures. The authors also note that the
denominator and numerator of the one-year cash ETR measure may be mismatched. Dyreng et al. (2008) use a longrun cash ETR measure, which is less volatile than the one-year cash ETR measure and also improves matching
between the numerator and denominator. We do not use long-run cash ETRs in our setting because such a measure
would, for some years in the post period, be estimated over both the pre-adoption and post-adoption years.
Furthermore, our tests examine change in cash effective tax rates over the four years following adoption, which also
mitigates concerns about the volatility and mismatching in the one-year measure. Nevertheless, our inferences are
unchanged when we use multi-year cash effective tax rate measures. 12
We include the year of adoption as the pre-adoption period because stock ownership plans effectively begin to
affect managerial ownership in the year following adoption. Inferences are unchanged when we delete the year of
adoption and compare the four years prior to the year of adoption to the four years subsequent to the year of
adoption.
13
divided by average total assets.13 Zimmerman (1983) argues political costs lead larger firms to
pay higher tax rates, and we control for SIZE. We define SIZE as the natural logarithm of
average total assets. Rego (2003) finds that multinational corporations exhibit lower worldwide
GAAP ETRs, and we control for whether the firm is a multinational corporation. MNC is an
indicator variable equal to one when a firm reports a non-missing value for foreign pre-tax
income, and zero otherwise. Interest expenses from debt are a qualified business expense, and we
control for leverage (LEV) by including total liabilities divided by average total assets. The
Economic Recovery Act of 1981 provides tax credits to firms that engage in certain types of
research and development (R&D), and we control for R&D as research and development expense
scaled by average total assets. Dyreng et al. (2014) find that average corporate taxes have
decreased over the past 25 years, and we include year fixed effects to mitigate concerns that our
results simply reflect the downward trend that Dyreng et al. (2014) document.14 Following Rego
and Wilson (2012), we control for the effect of equity risk incentives (VEGA) on tax avoidance.
As with Armstrong et al. (2015) we include board independence (BOARD_IND) and voting
power of directors (DIR_VOTING). If VEGA and DIR_VOTING are missing, we set these
variable to be zero and include an indicator variable (GOV_MISSING) that equals one, denoting
that these variables are missing. GOV_MISSING is zero otherwise (Cassell, Dreher, and Myers
2013). To control for the potential confounding effect of executive turnover around adoptions,
we include a variable that equals the proportion of the named executive officers that disappeared
from Execucomp over the most recent year (EXEC TURNOVER). In addition to the above
13
We set net operating losses equal to zero for firms with missing TLCF.
By comparing changes in effective tax rates in our treatment firms to changes at adoption-year-matched control
firms, our difference-in-differences research design also mitigates concerns that our results simply reflect the
downward trend in effective tax rates. 14
14
mentioned control variables, we include variables used in the first-stage model of a propensityscore matching procedure, which we explain below.
4.2. Using propensity-score-matched firms as control firms
As a second research design, we employ a propensity-score matching procedure
(Rosenbaum and Rubin 1983). Specifically, we examine the differential shift in tax avoidance
(i.e., cash ETR) between adoption firms and propensity-score-matched firms from the pre- to
post-adoption. To obtain propensity scores, we estimate a logistic model with variables that prior
work suggests affect the probability of ownership plan adoption. Consistent with boards adopting
plans to mitigate perceived governance problems, Core and Larcker (2002) find executives at
adoption firms exhibit low equity ownership prior to adoption. We include lagged CEO equity
ownership scaled by the market value of equity and the mean of the lagged equity ownership of
the other named executive officers, also scaled by the market value of equity. 15 With more
resources to implement governance reforms, large firms may be more likely to adopt an
ownership plan, and we included the lagged value of total assets. Because plans require
managers to retain a certain level of ownership, boards of firms with volatile stock prices may be
less likely to adopt an ownership plan. We include stock volatility as a determinant of plan
adoption. The series of accounting scandals in 2000 and 2001, and the passage of SarbanesOxley Act of 2002 (SOX), lead to several governance reforms, and we include a SOX indicator
variable in our prediction model. Finally, Core and Larcker (2002) document that adoption firms
exhibit poor price and accounting performance relative to their industry peers. As such, we
include stock returns and industry-adjusted performance as additional determinants of adoption.
The results of the propensity-score matching procedure are presented in Appendix B.
15
Appendix A lists and defines all covariates that we use in the propensity-score matching procedure. 15
To examine changes in tax planning around the adoption of stock ownership plans, we
estimate the following regression:
𝐶𝐸𝑇𝑅%,' = 𝜙* 𝑇𝑅𝐸𝐴𝑇%,' + 𝜙- 𝑃𝑂𝑆𝑇%,' + 𝜙1 𝑇𝑅𝐸𝐴𝑇 ∗ 𝑃𝑂𝑆𝑇%,' +
𝛽 ∗ 𝑌𝐸𝐴𝑅' + 𝜁%,' ,
𝜃 ∗ 𝐶𝑂𝑁𝑇𝑅𝑂𝐿8,%,' +
(2)
where TREAT is an indicator variable that equals one for the firms that adopted stock
ownership plans and zero for propensity-score-matched firms. Note that unlike equation (1),
where TREAT represents the adoption firms that required an increase in ownership for at least
one named executive, in equation (2) TREAT refers to all adoption firms. POST is an indicator
variable that equals one for firm-years that occur after a plan adoption. For the control firms,
POST equals one for firm-years that occur after the pseudo plan adoption. All other variables are
defined as in equation (1). Our independent variable of interest is the interaction between TREAT
and POST, and the coefficient estimate on the interaction represents the average treatment effect
for adoption firms relative to propensity-score-matched control firms. The incentive alignment
hypothesis (rent extraction hypothesis) predicts that TREAT*POST will be negative (positive),
consistent with tax planning increasing (decreasing) subsequent to adoption.
4.3. Using entropy-balanced firms as control firms
To complement the aforementioned research designs, we use entropy balancing to
construct counterfactuals (Hainmueller 2012). The crux of entropy balancing reweights a control
sample so the distributional characteristics (i.e., mean, variance, and skewness) are similar
between that control sample and the treatment sample (i.e., firms that adopted stock ownership
plans). To obtain entropy-balanced control firms, we use the same set of variables as in the
propensity-score matching procedure described above. Importantly, we also include the preadoption cash effective tax rate as an additional variable. This helps mitigate the potential that
16
changes in cash effective tax rates from the pre- to post-adoption period are an artifact of the
mean-reverting nature of cash effective rate rates.
Using entropy-balanced firms as counterfactuals, we estimate the following regression:
𝐶𝐸𝑇𝑅%,' = 𝛿* 𝑇𝑅𝐸𝐴𝑇%,' +
𝜃 ∗ 𝐶𝑂𝑁𝑇𝑅𝑂𝐿%,' + 𝜀%,'
(3)
where TREAT is an indicator variable that equals one for firms that adopted stock
ownership plans that required at least one named executive officer to increase stock ownership
(i.e., the increase-required sample) and zero for the associated entropy-balanced firms. All other
variables are defined as in equations (1) and (2). Unlike equations (1) and (2), we estimate
equation (3) for firm-years after a plan (pseudo) adoption. Our independent variable of interest is
the TREAT. Under the incentive alignment hypothesis (rent extraction hypothesis), the
coefficient estimate on TREAT should be negative (positive), consistent with tax planning
increasing (decreasing) post-adoption.
It is worth discussing the merits and limitations of the above research design choices.
Recent research points out the limitations of propensity score matching (PSM) (Shipman et al.
2015; DeFond et al. 2015). For example, Shipman et al. (2015) provide evidence suggesting that
design choices involved with PSM can influence the composition of propensity-score-matched
control samples and thus inferences about the treatment effect of interest. DeFond et al. (2015)
also echo that PSM is sensitive to several design choices that include (1) the number of control
firms per treatment firm, (2) the level of pruning, and (3) the inclusion of non-linear covariate
terms. A key takeaway from these papers is that inferences drawn from PSM can be sensitive to
innocuous (or potentially intentional) design choices. Entropy balancing mitigates some concerns
with PSM. For example, entropy balancing does not require researchers to choose the number of
17
control firms per treatment firm and the level of pruning. Entropy balancing, however, results in
a small number of control firms receiving unusually large weights.
Conversely, comparing the increase-required sample with the no-action-required sample
is free from potentially arbitrary research design choices that are inherent in both PSM and
entropy balancing. For example, it is somewhat arbitrary what variables are included in PSM and
entropy balancing. Thus, the results obtained from the two methods can be sensitive to
unobservable (excluded) correlated omitted variables. However, such benefits do not come
without costs. Firms that decided to adopt stock ownership plans are not likely to be a random
sample, creating a self-selection problem. To mitigate this problem, we estimate the Inverse
Mills ratio by estimating the prediction model of the adoption of the stock ownership plans and
include it in the second stage, equation (1). Nonetheless, we do not explicitly model firms’
decisions to require executives to increase ownership or not conditional on adopting the plans.
This concern can be mitigated partially by constructing entropy-balanced control firms for the
increase-required sample. In summary, we do not view any of the three research designs as
clearly superior to the others along all dimensions. Rather, we believe that the three methods
complement each other. Obtaining consistent results across alternative research designs gives us
more comfort in drawing inferences about the effect of managerial ownership on tax planning.
5. Estimation Results
5.1. Using firms that adopted stock ownership plans that required no named executive officer to
increase their stock ownership as control firms
5.1.1 Descriptive Statistics
Panels A and B of Table 1 provide descriptive statistics for our sample of firms that
adopted stock ownership plans between 1993 and 2012. The mean CETR for our sample is 25.6
18
percent pre-adoption and 24.6 percent post-adoption, which are below the U.S. federal statutory
rate of 35 percent for our sample period. The interquartile range of CETR ranges from 15.2 to
33.8 percent pre-adoption and from 13.7 to 32.7 percent post-adoption, which suggest the firms
in our sample exhibit varying degrees of tax planning.
In Panels C and D, we break the pre- and post-adoption sample of adoption firms into
two subsamples: (1) the increase-required and (2) no-action-required samples. To save space, we
only report the means of variables and differences therein along with p-values of t-tests of the
equality of the means of the two subsamples. Focusing on the pre-adoption sample (Panel C), the
two subsamples are different across some dimensions. The increase-required firms tend to be
smaller than the no-action-required firms (SIZE). Equity risk incentives (VEGA) are lower on
average for the increase-required sample than the no-action-required subsample, while directors’
voting power (DIR_VOTING) is higher on average for the increase-required sample than the noaction-required subsample. Relative to the no-increase-required firms, the increase-required
firms tend to be domestic firms (MNC) and experience a 1.6 percentage point higher executive
turnover. Evident in Panel D, some of pre-adoption differences between the two subsamples
vanish post-adoption. The two subgroups no longer exhibit statistically significant differences in
equity risk incentives (VEGA) or CEO turnovers (EXEC TURNOVER). Additionally, we do not
find statistically significant differences in CETR between the two subsamples in either the preadoption period or the post-adoption period.
5.1.2 Multiple Regressions Results
We begin by examining changes in cash effective tax rates for all adoption firms and
separately for the increase-required and no-action required subsamples. The results reported in
Panel A of Table 2 support the incentive alignment hypothesis. Focusing on all adoption firms in
19
Model (1), we find that the coefficient estimate on POST is -0.022 and statistically different from
zero (t-statistic = -2.58), suggesting that adoption firms exhibit a 2.2 percentage point decrease in
CETR from the pre- to post-adoption. As evident in Models (2) and (3), such decline in CETR is
attributable primarily to the increase-required subsample. The coefficient estimate on POST is
significantly negative (coefficient estimate = -0.028; t-statistic = -2.75) for the increase-required
subsample, while the corresponding coefficient estimate is insignificant for the no-actionrequired subsample (coefficient estimate = -0.015; t-statistic = -1.24). The coefficient estimate of
-0.028 indicates that the increase-required subsample experiences a 2.8 percentage point
decrease in CETR from the pre- to post-adoption.16 A 2.8 percentage point decline accounts for
11 percent of the pre-adoption mean CETR of the increase-required firms (11 percent =
0.028/0.256). The negative coefficient estimate on POST provides initial evidence in favor of the
incentive alignment hypothesis. A benefit of this result is that we are using each firm as its own
control, which mitigates concerns that time invariant firm characteristics drive our results. A
concern with this result, however, is that we may simply be capturing decreasing cash effective
tax rates through time. Our test in Panel B of Table 2 addresses this concern.
The results of estimating equation (1) are reported in Panel B of Table 2. The results
confirm the inference from Panel A. The coefficient estimate on TREAT*POST is significantly
negative (coefficient estimate = -0.021; t-statistic = -2.00). This suggests that adoption firms that
required at least one executive to increase stock ownership experience a 2.1 percentage point
decrease in CETR from the pre- to post-adoption period relative to adoption firms that do not
16
Estimating the effect of plan adoptions requires us to have observations in both the pre-adoption and postadoption period. Because we limit the sample in Panel A of Table 2 to include just firms that adopted plans, we
exclude year fixed effects because including year fixed effects would subsume the effect on POST during both the
beginning of our sample, when POST = 0, and the end of our sample, when POST = 1. In latter tests, we include
year fixed effects, because we also include a set of control variables and because TREAT*POST, rather than POST,
is our coefficient of interest in later tests. Inferences are unchanged when we exclude year fixed effects from later
tests.
20
require any executives to increase ownership. Overall, the results in Table 2 support the incentive
alignment hypothesis that managerial ownership is negatively associated with corporate tax
avoidance.
Our primary findings thus far document that adoption firms that require an increase in
stock ownership for at least one executive exhibit, on average, lower cash effective tax rates in
the four years following plan adoption. A natural question is whether firms sustain the cash tax
savings or whether the cash tax savings reverse. To investigate whether adoption firms maintain
the reduced cash effective tax rates beyond our sample period, we extend our sample to ten years
after plan adoption and re-estimate equation (1).
Table 3 presents the results. The negative coefficient estimate on the interaction between
TREAT and POST is statistically significant (coefficient estimate = -0.023, t-statistic = -2.09).
The economic magnitude in Table 3 is similar to the estimate on the TREAT*POST interaction in
Panel B of Table 2 (i.e., -0.021), which suggests that the reduction in cash tax savings persist
after the adoption of plans that require ownership increases. The results in Table 3 suggest that
managers are implementing tax planning strategies that are sustained upon audit.
5.2. Using propensity-score-matched firms as control firms
In this section, we present the results of estimating equation (2) in which we use
propensity-score-matched firms as control firms. Table 4 presents the results of estimating
equation (2). The results are consistent with the findings reported in the previous section. Model
1 presents the results for all adoption firms. The coefficient estimate on TREAT*POST is -0.024,
which is statistically significant. This coefficient estimate indicates that an average treatment
effect of a 2.4 percentage point reduction in cash effective tax rate from the pre- to post-adoption
period relative to propensity-score-matched control firms.
21
Next, we split our sample into adoption firms that require one or more executives to
increase ownership in the firm and those that require an ownership floor for executives, but set
the ownership floor below all executives’ current ownership. Model 2 presents the results for the
firms that require an increase in managerial ownership. In Model 2, the coefficient estimate on
the interaction between TREAT and POST is -0.029, which is statistically significant (t-statistic =
-2.72). A 2.9 percentage point reduction represents an economically significant 11.1 percent
reduction relative to the pre-adoption mean CETR for that sample (11.1 percent = 0.029/0.261).
Model 3 presents the results for the firms that require no increase in managerial ownership. In
Model 3, the coefficient estimate on TREAT*POST is statistically insignificant (t-statistic = 1.31). Overall, the stronger reduction in cash effective tax rates in adoption firms that require an
increase in ownership is consistent with the findings in the previous section.
Although we find statistically significant results using PSM, it is also possible that
unobservable correlated omitted variables confound our inference. This problem is often referred
to as “hidden bias.” Following Rosenbaum (2002), we compute Γ, the odds ratio, to assess how
sensitive our results are to hidden bias. We find that depending on specification, Γ is 1.45 to 1.85
for our results. These estimates suggest that our results are sensitive to an unobserved variable
that makes adoption 45 to 85 percent more likely, but we are robust to an unobserved variable
that makes adoption 44 percent more likely. Thus, while our propensity-score matching results
are statistically significant, they should be interpreted with caution. We provide additional
support for our inferences to mitigate concerns regarding selection on unobserved variables.
Specifically, we mitigate concerns regarding selection on unobservable variables by controlling
for the Inverse Mills ratio when using adoption firms that require no executive to increase stock
ownership as a control sample.
22
To address the sustainability of the cash tax savings relative to propensity-score-matched
control firms, we extend our sample to ten years after plan (pseudo) adoption and re-estimate
equation (2). The results in Table 5 suggest that aggressive tax strategies that are implemented
post-adoption are sustained for an extended period. We find significant negative coefficient
estimates on the interaction between TREAT and POST for all adoption firms in Model 1
(coefficient estimate = -0.027; t-statistic = -2.56). Model 2 shows such a decrease is attributable
to adoption firms that required ownership increases. Overall, we conclude that managers do not
seem to engage in overly aggressive tax planning after a plan adoption relative to propensityscore-matched control firms.
One concern with PSM analyses is that the changes in cash effective tax rates that we
have documented thus far can be an artifact of the mean-reverting nature of cash ETRs. If so, one
would expect to observe changes in cash ETRs without a treatment effect. In the context of our
setting, changes in cash effective tax rates may not be due to the remediation of agency conflicts,
but to the data-generation process. Another concern is whether the difference-in-differences
estimator maintains a zero-correlation assumption. The assumption requires that the coefficient
estimate on the interaction between TREAT and POST results from the treatment effect, rather
than from preexisting trend differences between treatment and control firms (Roberts and Whited
2012).
To address these concerns, we examine changes in cash effective tax rates around a false
adoption date. For the false adoption date, we use four years prior to the actual adoption. The
choice of this date prevents any true post years from being in the post group and maximizes the
nearness to the true adoption. Documenting a reduction in cash effective tax rates for treatment
23
firms in this test would suggest the confounding effect of the mean-reversion of cash effective
tax rates or pre-existing trends bias our results.
Table 6 presents the falsification results. Rather than only examine falsification results
for the adoption firms that require an increase in ownership, we also examine results for all
adoption firms and adoption firms that require no action on the part of executives. We examine
each of the three samples because we draw inferences on each sample. Mean-reversion of cash
effective tax rates, or a violation of the zero-correlation assumption, could bias the inferences we
draw for an individual sample without necessarily appearing in the other samples. In Model 1,
we find no evidence of a statistically significant negative coefficient on the TREAT*POST
interaction term (t-statistics = -0.18). When we split the sample into firms that require an
ownership increase (Model 2) and firms that require no action (Model 3), we again find no
evidence that pre-existing trends in the pre-event period bias our results. For the firms that are
the focus of our study, firms that require an ownership increase, the coefficient estimate on
TREAT*POST is an economically and statistically insignificant (coefficient estimate = 0.000; tstatistics = 0.03). Overall, the results of our falsification tests mitigate concerns that our results
are artifacts of data-generating process (i.e., mean-reversion of cash effective tax rates) or driven
by a violation of the zero-correlation assumption.
5.3. Using entropy-balanced firms as control firms
As a final set of analyses, we present the results of using entropy-balanced firms as
counterfactuals in Table 7. Note that the treatment firms are those that adopted stock ownership
plans that required at least one named executive officer to increase stock ownership (i.e., the
increase-required sample), while the control firms are the associated entropy-balanced control
firms. In a nutshell, the results confirm the previous findings. The coefficient estimate on TREAT
24
is -0.016 and statistically significant (t-statistic = -2.52). This indicates that the increase-required
sample firms exhibit a 1.6 percent point decrease in cash ETR post-adoption relative to entropybalanced control firms. A 1.6 percentage point reduction represents an economically significant
11.1 percent reduction relative to the pre-adoption mean CETR for that sample (6.3 percent =
0.016/0.256). As noted previously, we include the pre-adoption CETR as a variable on which the
treatment and control samples are entropy balanced. This result helps attenuate the alternative
explanation that post-adoption differences in cash effective tax rates between the treatment and
control samples can be an artifact of the mean-reverting nature of cash effective tax rates, i.e., the
pre-adoption levels of cash effective tax rates.
6. Conclusion
This paper contributes to the literature in several ways. First, we provide evidence on the
relation between managerial ownership and tax avoidance by employing a difference-indifferences approach. Prior work provides evidence on the cross-sectional relation between
various ownership structures and tax avoidance. The difference-in-differences approach
increases our confidence in drawing inferences on a relation between the ownership structure and
firms’ tax planning strategies. Second, this paper sheds light on the literature that examines the
determinants of tax avoidance by providing evidence on the impact of the remediation of agency
problems between managers and shareholders on tax avoidance activities.
We find that following the adoption of a stock ownership plan, adoption firms increase
their tax planning, and on average, exhibit a lower cash effective tax rate. Upon splitting
adoption firms into firms that require an increase in managerial ownership and firms that require
no such increase, our results cluster in the firms that require increases in managerial ownership.
25
Additional analysis reveals that our results are neither attributable to mean-reversion of cash
effective tax rates, nor are our results attributable to pre-existing trends in cash effective tax rates
prior to the adoption. We also find that our results are not due to covariate imbalance between
the treatment and control firms. Overall, our results suggest that improved incentive alignment is
associated with an increase in tax avoidance consistent with reduced agency conflicts mitigating
under-investment in tax avoidance, consistent with the incentive alignment hypothesis.
Our analysis is subject to caveats. First, our sample consists of S&P 1500 firms, which
contains large-cap firms (i.e., the S&P 500), mid-cap firms (i.e., the S&P 400), and small-cap
firms (i.e., the S&P 600). As such, our results may not generalize to micro-cap firms. Second, we
focus on a set of firms traded on U.S. exchanges, and our analysis should not be generalized to
include international or privately-held firms. Finally, we focus on a set of firms that require one
or more executives to increase ownership in the firm, and our results should not be generalized to
mean that increased ownership is positively associated with tax planning for firms that adopt no
such plans.
26
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28
Appendix A: Variable definitions
Definition
Matching variables
CEO_OWN
CEO equity ownership scaled by market value of equity
IND_ADJ_ROA
RETURNS
Income before special items scaled by average assets, minus the median ROA
of firms in the same two-digit SIC industry that year
Mean equity ownership of other (i.e., non-CEO) named executive officers
scaled by market value of equity
Buy-and-hold stock returns over the prior calendar year
SIZE
Log of total assets
SOX
Indicator variable equal to one for fiscal years ending after 2002, zero
otherwise
Standard deviation of daily stock returns over the prior calendar year
NEO_OWN
STD
Test variables
CETR
LEV
MNC
Cash effective cash rate, measured as cash taxes paid divided by pretax income
minus special items
Leverage, measured as total liabilities divided by average total assets
R&D
Multinational indicator equal to one for firms with non-missing foreign
income, zero otherwise
Net operating loss, measured as Tax Loss Carry Forwards divided by average
total assets
Post indicator variable that equals one for firm-years that occur after a plan
adoption. For the control firms, POST equals one for firm-years that occur after
the pseudo plan adoption
Pre-tax profitability, measured as pre-tax income divided by average total
assets
Research and development divided by average total assets
SIZE
Natural logarithm of average total assets
TREAT
BOARD_IND
Treatment indicator variable that equals one for adoption firms that require at
least one executive to increase stock ownership, and zero otherwise for
equation (1); Treatment indicator variable that equals one for firms that adopt
stock ownership plans, and zero otherwise for equations (2) and (3)
The percentage of independent directors
DIR_VOTING
Percent control of voting power for all directors
EXEC TURNOVER
Variable equal to the proportion of executive officers that appear in
Execucomp in the prior year, but do not appear in the current year
NOL
POST
PT_ROA
29
Appendix B: Matching Model
Panel A: Prediction Model
Dep. variable = adopt
CONSTANT
Model
-2.289***
(0.00)
-5.593***
(0.00)
-7.396***
(0.01)
0.113***
(0.00)
-10.797***
(0.00)
1.0153***
(0.00)
0.355
(0.24)
0.084**
(0.02)
CEO_OWN
NEO_OWN
SIZE
STD
SOX
IND_ADJ_ROA
RETURNS
Year matching
Y
Observations
Adjusted R-squared
7109
0.16
Panel B: Covariate Balance
VARIABLES
Control
Treatment
Difference
p-value
0.001
0.000
-0.257
0.002
0.010
0.092
0.661
0.938
0.056
0.063
0.133
0.021
-0.002
0.000
-0.524
0.000
-0.001
-0.095
0.232
0.860
0.003
0.748
0.872
0.573
Increased-required firms
CEO_OWN
NEO_OWN
SIZE
STD
IND_ADJ_ROA
RETURNS
0.007
0.002
7.842
0.024
0.030
0.201
0.007
0.002
8.098
0.022
0.021
0.109
No-increased-required firms
CEO_OWN
NEO_OWN
SIZE
STD
IND_ADJ_ROA
RETURNS
0.005
0.002
8.184
0.023
0.037
0.295
0.007
0.002
8.708
0.022
0.038
0.390
Panel A provides coefficient estimates on the variables that we use to estimate propensity scores. p-values are in
parentheses. Panel B presents covariate balance. See Appendix A for variable definitions.
30
Figure 1
Frequency of Stock Ownership Plan Adoptions by Year
45
40
35
30
25
20
15
10
5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
INC_REQ=0
INC_REQ=1
This figure provides the number of firms that adopted stock ownership plans by year. The left bar (i.e., INC_REQ =
0) of each year represents firms that adopted stockownership plans that required at least one named executive officer
to increase stock ownership. The right bar (i.e., INC_REQ = 1) of each year represents firms that adopted stock
ownership plans that required no named executive officer to their increase stock ownership.
31
Table 1
Descriptive Statistics
Panel A: Descriptive Statistics of Adoption Firms (Pre-adoption)
CETR
PT_ROA
NOL
∆NOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
DIR_VOTING
GOV_MISSING
EXEC TURNOVER
N
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
MEAN
0.256
0.099
0.019
0.001
8.313
0.555
0.621
0.018
4.338
0.526
0.034
0.411
0.121
STD
0.176
0.085
0.083
0.021
1.619
0.497
0.209
0.036
1.517
0.330
0.100
0.492
0.142
p25
0.152
0.042
0.000
0.000
7.192
0.000
0.486
0.000
3.438
0.000
0.000
0.000
0.000
p50
0.256
0.082
0.000
0.000
8.220
1.000
0.616
0.000
4.463
0.667
0.000
0.000
0.125
p75
0.338
0.136
0.001
0.000
9.498
1.000
0.747
0.019
5.375
0.778
0.021
1.000
0.200
Panel B: Descriptive Statistics of Adoption Firms (Post-adoption)
CETR
PT_ROA
NOL
∆NOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
DIR_VOTING
GOV_MISSING
EXEC TURNOVER
N
1229
1229
1229
1229
1229
1229
1229
1229
1229
1229
1229
1229
1229
MEAN
0.246
0.099
0.028
0.001
8.621
0.601
0.630
0.019
4.332
0.688
0.031
0.314
0.125
STD
0.164
0.081
0.099
0.037
1.578
0.490
0.199
0.038
10.640
0.257
0.091
0.464
0.146
32
p25
0.137
0.043
0.000
0.000
7.459
0.000
0.503
0.000
3.770
0.636
0.000
0.000
0.000
p50
0.247
0.082
0.000
0.000
8.535
1.000
0.631
0.000
4.790
0.778
0.000
0.000
0.125
p75
0.327
0.135
0.013
0.000
9.780
1.000
0.756
0.021
5.656
0.857
0.021
1.000
0.200
Table 1 (cont’d)
Descriptive Statistics
Panel C: Differences in Means across Adoption Firms (Pre-adoption)
CETR
PT_ROA
NOL
∆NOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
DIR_VOTING
GOV_MISSING
EXEC TURNOVER
No Action
required
0.248
0.103
0.022
0.000
8.733
0.582
0.629
0.019
4.614
0.535
0.026
0.423
0.112
Increase
Required
0.261
0.096
0.017
0.002
8.033
0.537
0.616
0.017
4.153
0.521
0.039
0.402
0.128
Diff.
p-value
-0.014
0.007
0.004
-0.002
0.700
0.045
0.014
0.003
0.461
0.014
-0.013
0.021
-0.016
0.139
0.114
0.307
0.156
0.000***
0.086*
0.220
0.178
0.000***
0.416
0.012**
0.416
0.031**
Panel D: Differences in Means across Adoption Firms (Post-adoption)
CETR
PT_ROA
NOL
∆NOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
DIR_VOTING
GOV_MISSING
EXEC TURNOVER
No Action
required
0.251
0.105
0.024
0.003
9.134
0.620
0.640
0.019
4.274
0.692
0.022
0.330
0.122
Increase
Required
0.243
0.096
0.030
0.000
8.265
0.588
0.624
0.019
4.372
0.685
0.037
0.303
0.126
Diff.
p-value
0.008
0.009
-0.006
0.003
0.869
0.032
0.016
0.000
-0.098
0.007
-0.015
0.027
-0.004
0.386
0.049**
0.291
0.118
0.000***
0.249
0.156
0.858
0.871
0.638
0.004***
0.310
0.618
This table presents descriptive statistics for variables used in our analyses for adoption firms. Panels A and B display
descriptive statistics for the pre- and post-adoption period. Panels C and D present descriptive statistics for firms that
adopted stockownership plans that required at least one named executive officer to increase stock ownership (i.e.,
the increase-required sample) and firms that adopted stock ownership plans that required no named executive officer
to their increase stock ownership (i.e., the no-action-required sample) for the pre- and post-adoption period. See
Appendix A for variable definitions.
33
Table 2
The Effect of Stock Ownership Plans on Tax Avoidance: Within-Adoption Firms
Panel A: Changes analyses from the pre- to post-adoption
Dep. variable = CETR
POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
DIR_VOTING
EXEC TURNOVER
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
Observations
Adjusted R-squared
(1)
All
-0.022***
(-2.58)
0.074
(0.85)
-0.127
(-1.45)
0.017
(0.11)
0.037***
(3.17)
0.022*
(1.88)
-0.064**
(-2.48)
-0.352**
(-2.47)
-0.000
(-0.75)
0.006
(0.39)
0.021
(0.66)
0.017
(0.86)
Y
Y
N
Y
Y
2,779
0.135
(2)
Increase required
-0.028***
(-2.75)
0.050
(0.48)
-0.102
(-0.93)
-0.022
(-0.12)
0.044**
(2.56)
0.016
(0.94)
-0.106***
(-3.23)
-0.369*
(-1.88)
-0.012***
(-2.78)
-0.007
(-0.30)
0.020
(0.54)
0.023
(1.22)
Y
Y
N
Y
Y
1,655
0.183
(3)
No action required
-0.015
(-1.24)
0.051
(0.25)
-0.215***
(-4.55)
0.304
(1.34)
0.032
(1.22)
0.042**
(2.54)
-0.028
(-0.62)
-0.413**
(-2.17)
-0.000
(-0.30)
0.036
(1.39)
-0.012
(-0.35)
0.009
(0.18)
Y
Y
N
Y
Y
1,124
0.153
Panel A presents the results of examining the changes in cash effective tax rates for firms that adopted stock
ownership plans. Column (1) shows the results for all adoption firms. Column (2) reports the results for firms that
adopted stockownership plans that required at least one named executive officer to increase stock ownership.
Column (3) displays the results for firms that adopted stock ownership plans that required no named executive
officer to their increase stock ownership. Variable definitions are in Appendix A. t-statistics are in parentheses, ***
p<0.01, ** p<0.05, * p<0.1.
34
Table 2 (cont’d)
Panel B: Difference-in-differences analyses from the pre- to post-adoption period
Dep. variable = CETR
TREAT
(1)
0.015
(1.33)
0.002
(0.16)
-0.021**
(-2.00)
0.015
(0.18)
-0.084
(-0.96)
0.031
(0.21)
0.034**
(2.54)
0.016
(1.31)
-0.062***
(-2.60)
-0.446***
(-3.02)
0.000
(0.00)
0.025
(1.46)
0.027
(1.03)
-0.002
(-0.07)
-0.046**
(-2.01)
Y
Y
Y
Y
Y
Y
2,779
0.167
POST
TREAT*POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
INVERSE MILLS RATIO
Gov_missing
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
Observations
Adjusted R-squared
Panel B displays the results of exploring the shift in cash effective tax rates between firms that adopted
stockownership plans that required at least one named executive officer to increase stock ownership and those that
adopted stock ownership plans that required no named executive officer to their increase stock ownership from the
pre- to post-adoption period. Variable definitions are in Appendix A. t-statistics are in parentheses, *** p<0.01, **
p<0.05, * p<0.1.
35
Table 3
Does Tax Avoidance Reverse? Within-Adoption Firms
Dep. variable = CETR
TREAT
(1)
0.018
(1.63)
0.008
(0.65)
-0.023**
(-2.09)
0.058
(0.80)
-0.072
(-0.92)
0.100
(0.90)
0.019*
(1.88)
0.019*
(1.91)
-0.066***
(-3.10)
-0.533***
(-3.96)
0.000
(1.12)
0.015
(0.93)
0.023
(0.87)
0.014
(0.86)
-0.059***
(-2.88)
Y
Y
Y
Y
Y
Y
3,780
0.153
POST
TREAT*POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
INVERSE MILLS RATIO
Gov_missing
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
Observations
Adjusted R-squared
This table presents the results of examining whether tax avoidance reverses between firms that adopted
stockownership plans that required at least one named executive officer to increase stock ownership and those that
adopted stock ownership plans that required no named executive officer to their increase stock ownership from the
pre- to post-adoption period. The pre- and post-adoption periods span four years and ten years respectively. Variable
definitions are in Appendix A. t-statistics are in parentheses, *** p<0.01, ** p<0.05, * p<0.1.
36
Table 4
The Effect of Stock Ownership Plans on Tax Avoidance: Propensity Score Matching
Dep. variable = CETR
Gov_missing
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
(1)
All
0.014
(1.30)
0.010
(0.91)
-0.024**
(-2.17)
-0.014
(-0.22)
-0.109***
(-2.60)
0.202*
(1.90)
0.033***
(2.87)
0.014
(1.48)
-0.078**
(-2.54)
-0.497***
(-3.23)
-0.000
(-0.66)
-0.001
(-0.05)
0.009
(0.22)
0.028**
(2.31)
Y
Y
Y
Y
Y
Y
(2)
Increase required
0.029***
(2.67)
0.004
(0.39)
-0.029***
(-2.72)
-0.033
(-0.49)
-0.119**
(-2.40)
0.167
(1.44)
0.040***
(2.75)
0.017
(1.32)
-0.116***
(-3.58)
-0.451**
(-2.37)
-0.010**
(-2.45)
0.001
(0.04)
0.031
(0.70)
0.030*
(1.90)
Y
Y
Y
Y
Y
Y
(3)
No action required
-0.015
(-0.99)
0.019
(0.86)
-0.025
(-1.31)
-0.049
(-0.50)
-0.077
(-1.54)
0.301
(1.60)
0.032
(1.41)
0.019
(1.18)
-0.023
(-0.56)
-0.663***
(-3.75)
0.000
(0.17)
0.010
(0.36)
-0.014
(-0.22)
0.015
(0.93)
Y
Y
Y
Y
Y
Y
Observations
Adjusted R-squared
5,164
0.197
3,084
0.233
2,080
0.213
TREAT
POST
TREAT*POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
This table presents the results of examining the shift in cash effective tax rates between firms that adopted stock
ownership plans and the propensity-matched control firms from the pre- to post-adoption period. Column (1) shows
the results for all firms. Column (2) reports the results for firms that adopted stockownership plans that required at
least one named executive officer to increase stock ownership and the associated set of propensity-score-matched
control firms. Column (3) displays the results for firms that adopted stock ownership plans that required no named
executive officer to their increase stock ownership and the associated set of propensity-score-matched control firms.
Variable definitions are in Appendix A. t-statistics are in parentheses, *** p<0.01, ** p<0.05, * p<0.1.
37
Table 5
Does Tax Avoidance Reverse? Propensity-score matching results
Dep. variable = CETR
(1)
All
0.017
(1.53)
0.010
(1.04)
-0.027**
(-2.56)
0.002
(0.03)
-0.112***
(-2.80)
0.187**
(2.08)
0.015
(1.57)
0.012
(1.38)
-0.088***
(-3.38)
-0.562***
(-4.08)
-0.000
(-0.74)
-0.002
(-0.13)
0.005
(0.13)
0.039***
(3.61)
(2)
Increase required
0.031***
(2.81)
0.006
(0.60)
-0.032***
(-3.04)
-0.003
(-0.04)
-0.124**
(-2.56)
0.133
(1.33)
0.020*
(1.86)
0.015
(1.33)
-0.110***
(-4.19)
-0.545***
(-3.34)
-0.007*
(-1.80)
-0.001
(-0.08)
0.021
(0.47)
0.041***
(2.87)
(3)
No action required
-0.011
(-0.76)
0.014
(0.78)
-0.028
(-1.61)
-0.034
(-0.39)
-0.086*
(-1.77)
0.321**
(2.01)
0.020
(1.31)
0.013
(0.80)
-0.052
(-1.29)
-0.691***
(-4.55)
-0.000
(-0.19)
-0.002
(-0.08)
-0.018
(-0.30)
0.024
(1.37)
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Observations
Adjusted R-squared
6,799
0.177
4,062
0.211
2,737
0.187
TREAT
POST
TREAT*POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
This table presents the results of examining whether tax avoidance reverses. The pre- and post-adoption periods span
four years and ten years respectively. Column (1) shows the results for all firms. Column (2) reports the results for
firms that adopted stockownership plans that required at least one named executive officer to increase stock
ownership and the associated set of propensity-score-matched control firms. Column (3) displays the results for
firms that adopted stock ownership plans that required no named executive officer to their increase stock ownership
and the associated set of propensity-score-matched control firms. Variable definitions are in Appendix A. t-statistics
are in parentheses, *** p<0.01, ** p<0.05, * p<0.1.
38
Table 6
Falsification Test
Dep. variable = CETR
(1)
All
0.020*
(1.70)
-0.013
(-1.24)
-0.002
(-0.18)
-0.052
(-0.77)
-0.188***
(-3.81)
0.332**
(2.57)
0.031***
(2.98)
0.019**
(2.30)
-0.060*
(-1.83)
-0.488***
(-4.37)
-0.006**
(-2.01)
-0.013
(-0.53)
0.021
(0.52)
0.025
(1.16)
(2)
Increase required
0.034**
(2.48)
-0.017
(-1.09)
0.000
(0.03)
-0.050
(-0.76)
-0.218***
(-3.28)
0.447***
(3.04)
0.039***
(2.94)
0.027**
(2.06)
-0.076*
(-1.79)
-0.440***
(-3.29)
-0.009***
(-2.66)
-0.001
(-0.05)
0.063
(1.41)
0.018
(0.78)
(3)
No action required
-0.002
(-0.11)
-0.005
(-0.25)
-0.009
(-0.46)
-0.079
(-0.86)
-0.177***
(-2.78)
0.267*
(1.70)
0.020
(1.12)
0.006
(0.38)
-0.029
(-0.65)
-0.636***
(-3.82)
-0.002
(-0.45)
-0.015
(-0.40)
-0.010
(-0.18)
0.033
(0.81)
Gov_missing
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Covariate controls
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Observations
Adjusted R-squared
4,105
0.259
2,443
0.279
1,662
0.299
TREAT
POST
TREAT*POST
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
This table presents the results of conducting falsification tests (i.e., parallel shift). Column (1) shows the results for
all firms. Column (2) reports the results for firms that adopted stockownership plans that required at least one named
executive officer to increase stock ownership and the associated set of propensity-score-matched control firms.
Column (3) displays the results for firms that adopted stock ownership plans that required no named executive
officer to their increase stock ownership and the associated set of propensity-score-matched control firms. Variable
definitions are in Appendix A. t-statistics are in parentheses, *** p<0.01, ** p<0.05, * p<0.1.
39
Table 7
The Effect of Stock Ownership Plans on Tax Avoidance: Entropy Balancing
Dep. variable = CETR
TREAT
(1)
-0.016**
-2.52
0.208***
4.58
-0.061***
-2.77
0.037
0.64
0.001
0.33
-0.003
-0.38
0.001
0.04
-0.378***
-4.25
-0.005
-1.47
0.011
0.84
-0.003***
-3.27
0.051**
2.27
N/A
N/A
Y
Y
1866
0.1653
PT_ROA
NOL
ΔNOL
SIZE
MNC
LEV
R&D
VEGA
BOARD_IND
BOARD_VOTING
EXEC TURNOVER
Cluster by firm
Cluster by year
Year fixed effects
Industry fixed effects
Observations
R-squared
This table presents the results of examining the shift in cash effective tax rates between firms that adopted
stockownership plans that required at least one named executive officer to increase stock ownership and the
associated set of entropy-balanced control firms from the pre- to post-adoption period. Variable definitions are in
Appendix A. t-statistics are in parentheses, *** p<0.01, ** p<0.05, * p<0.1.
40