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Stakeholder Agency Relationships: CEO Stock Options and Corporate Tax Avoidance
Author(s) -
Zolotoy Leon,
O’Sullivan Don,
Martin Geoffrey P.,
Wiseman Robert M.
Publication year - 2021
Publication title -
journal of management studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.398
H-Index - 184
eISSN - 1467-6486
pISSN - 0022-2380
DOI - 10.1111/joms.12623
Subject(s) - incentive , corporate governance , stakeholder , stock options , tax avoidance , business , shareholder , corporate tax , accounting , principal–agent problem , executive compensation , stock (firearms) , agency (philosophy) , agency cost , finance , economics , microeconomics , double taxation , mechanical engineering , philosophy , management , epistemology , engineering
Infusing stakeholder agency theory with insights from behavioural agency theory, we describe a frame‐dependent relationship between CEO stock option incentives and tax avoidance. Our theoretical framework highlights the role of competing shareholder demands in providing a salient reference point for a CEO contemplating the implications of tax avoidance for their stock option wealth. In a study of 2,573 publicly listed U.S. firms between 1993 and 2014, we show that the implications of CEO stock option incentives are contingent on whether the firm’s effective tax rate is anticipated to be below or above the tax rate of peer firms – an outcome that the CEO can cast as balancing stakeholder demands. Consistent with our theoretical reasoning, we also show that, both above and below this reference point, the implications of option incentives for corporate tax avoidance are amplified by the level of activist institutional ownership and attenuated by the CEO’s ability to unwind their bond with shareholders through hedging. In doing so, our study offers an impetus for a broader stakeholder approach to governance research examining CEO incentive alignment.