Fabio B. Gaertner

CEO After-Tax Compensation Incentives and Corporate Tax Avoidance

I examine the association between CEOs’ after-tax incentives and their firms’ level of tax avoidance. Economic theory holds that firms should compensate CEOs on an after-tax basis when the expected tax savings generated from additional incentive alignment outweigh the incremental compensation demanded by CEOs for bearing additional tax-related compensation risk. Using hand-collected data from proxy statements, I find a negative relation between the use of after-tax incentives and effective tax rates. I also find a positive association between the use of after-tax incentives and CEO cash compensation, suggesting that CEOs who are compensated on an after-tax basis demand a premium for bearing additional risk.

The Influence of Ownership and Compensation Practices on Charitable Activities

Recent accounting research provides evidence that similar profit-based compensation incentives are used in for-profit and nonprofit hospitals. Because charity care reduces profits, such incentives should lead for-profit hospital managers to reduce charity care levels. Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints. We compare the association between pay-for-performance incentives and charity care in for-profit and nonprofit hospitals. We find a negative and significant association between charity care and our proxy for profit-based incentives in for-profit hospitals, and no significant association in nonprofit hospitals. These results suggest that linking manager pay to profitability does not appear to discourage charity care in nonprofit hospitals. Apparently, the nonprofit mission, institutional pressures, and ownership constraints moderate the potentially negative effects of profit-based incentives. Because this evidence partially alleviates concerns over nonprofit compensation arrangements that mirror those used in for-profit hospitals, it should be of interest to regulators and policymakers. In addition, this study provides insights into accounting researchers about institutional and organizational influences that affect managerial responses to financial incentives in compensation contracts.

Book-tax conformity and capital structure

We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms’ reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity relative to control firms and that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and towards more debt in the presence of higher book-tax conformity.

Can Paying “Too Much” or “Too Little” Tax Contribute to Forced CEO Turnover?

Our study examines the effect of corporate tax outcomes on forced CEO turnover. While prior research argues that firms often do not engage in tax avoidance due to reputational concerns, the empirical evidence suggesting the existence of reputational costs is scarce. In a broad sample of firms, we find evidence of a relation between the payment of low taxes and forced turnover. We also find that forced CEO turnover is more likely when the firm pays a high tax rate. Our results are consistent with the existence of previously unexplored individual reputational costs for not engaging in tax avoidance.

Overconfidence and Corporate Tax Policy

Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. We find robust evidence of a positive relation between proxies for corporate tax avoidance and CEO overconfidence. Because our empirical tests use a panel of firm-years with exogenous CEO departures and include controls for stationary firm effects as well as observable firm characteristics, we can better isolate the role of an idiosyncratic personality trait (i.e., overconfidence) on corporate tax outcomes, thus adding to the literatures on overconfidence, managerial effects, and tax avoidance.

The Effects of the Tax Cuts & Jobs Act of 2017 on Defined Benefit Pension Contributions

This study examines the effect of the Tax Cuts & Jobs Act of 2017 (TCJA) on corporate defined benefit pension contributions. The TCJA decreases the corporate tax rate from 35 in 2017 to 21 percent in 2018, and thereafter. This change incentivizes firms to increase 2017 pension contributions to take advantage of tax deductions at a higher rate. Consistent with this incentive, we find firms increase defined benefit pension contributions by an average of 25 to 31 percent in 2017 compared to earlier years. We also find that taxpaying firms are the primary contributors. Further, taxpaying firms with high levels of pension-related deferred tax assets contribute over three times as much as taxpaying firms with low levels of pension-related deferred tax assets. We also find firms that increase in pension contributions in 2017 reduce 2018 contributions, consistent with intertemporal income shifting rather than a permanent change in pension funding strategy.

The Determinants of Segment-Level Tax Expense Disclosure

This study examines the determinants of the disclosure of segment-level tax expense. Segment reporting rules require firms to report segment-level profit using a definition of earnings that is consistent with profit measures used for internal reporting. Thus, we expect firms using after-tax performance measures for internal reporting to define segment-level profit on an after-tax basis. However, given the ambiguous nature of segment reporting rules, firms with higher proprietary costs of disclosure may choose to report segment-level profit on a pre-tax basis, thus avoiding segment-level tax reporting. We find that only 13.8% of all multi-segment firms report after-tax profits at the segment-level. Using the presence of after-tax CEO incentives as a proxy for the internal use of after-tax segment performance (Phillips 2003), we find a positive association between after-tax incentive use and segment-level tax reporting in our full sample. We also find a negative association between effective tax rates and segment-tax reporting; suggesting firms engaging in tax avoidance are less likely to disclose segment-level taxes. We then split our sample of firms into those defining segments along geographic rather than non-geographic lines and find that the use of after-tax incentives increases the likelihood of reporting only for non-geographic-based operating segments, while proprietary costs of disclosure (i.e., ETRs) only decrease the likelihood of reporting for geographic-based operating segments. Overall, our results suggest discretion in ASC 280 is used to reduce disclosure quality of segment-level taxes for firms with geographic-based segments.

Shareholder Wealth Effects of Border Adjustment Taxation

Abstract Following 2 decades of discussion, the border adjustment tax (BAT) briefly emerged as part of proposed US corporate tax reform in early 2017. While heavily debated, little empirical evidence exists regarding the BAT. We take advantage of the period during which the BAT was under strong consideration to examine its effects on shareholder value. We find that high-importing firms (measured using industry, aggregate government industry data, and firm-level shipping-container data) suffer negative returns on days the tax had a greater likelihood of adoption. We also find that firms lobbying for the BAT experience positive returns over that same time period.

The Usefulness of Negative Aggregate Earnings Changes in Predicting Future Gross Domestic Product Growth

Konchitchki and Patatoukas (2014) (hereafter KP 2014) show that aggregate accounting earnings growth predicts future nominal Gross Domestic Product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition KP’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth up to three quarters ahead while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. In additional analyses we find evidence suggesting the incremental usefulness of negative earnings changes is driven by accounting conservatism rather than other drivers of asymmetric timeliness in earnings.