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Book-tax differences: are they affected by equity-based compensation?

Author

Listed:
  • Chunwei Xian
  • Fang Sun
  • Yinghong Zhang

Abstract

Purpose - – This study aims to investigate the moderating effect of equity-based compensation on the sources of book-tax differences. The authors investigate whether equity-based compensation affects the association between book-tax differences and tax planning, and the association between book-tax differences and earnings management. Design/methodology/approach - – The authors use a sample of 9,024 firm-year observations (913 firms) spanning the period 1992-2011, obtained from ExecuComp and Compustat. They estimate cross-sectional regressions of the proxy for tax planning, discretionary accruals and their interactions with equity-based compensation on book-tax differences. Findings - – The authors find that tax planning-related book-tax differences increase as the equity-based pay of executives does, and that earnings management-related book-tax differences decrease as the equity-based pay of executives increases. The results are robust across three alternative measures of tax planning. Originality/value - – Equity-based compensation plays an important role in managerial discretion on tax planning and earnings management. The findings suggest that, although equity incentives promote a high level of both tax planning and earnings management, they motivate managers to constrain the level of earnings management to avoid larger book-tax differences.

Suggested Citation

  • Chunwei Xian & Fang Sun & Yinghong Zhang, 2015. "Book-tax differences: are they affected by equity-based compensation?," Accounting Research Journal, Emerald Group Publishing Limited, vol. 28(3), pages 300-318, November.
    • Handle: RePEc:eme:arjpps:v:28:y:2015:i:3:p:300-318
    DOI: 10.1108/ARJ-12-2013-0088
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    Citations

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    Cited by:

    1. Kovermann, Jost & Velte, Patrick, 2019. "The impact of corporate governance on corporate tax avoidance—A literature review," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 36(C), pages 1-1.
    2. Abdul Wahab, Nor Shaipah & Ntim, Collins G. & Tye, Wei Ling & Shakil, Mohammad Hassan, 2022. "Book-tax differences and risk: Does shareholder activism matter?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 48(C).
    3. Dyussembina, Saule & Park, Kunsu, 2024. "Book-tax differences, dividend payout, and firm value," International Review of Financial Analysis, Elsevier, vol. 91(C).

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