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Managerial Short-Termism and Corporate Tax Avoidance

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CEOs with substantial short-term equity incentives behave myopically out of concerns for the stock price. We argue that corporate tax avoidance, given its positive impact on stock prices, is one potential target for managerial myopia. We show that, ceteris paribus, CEO short-term equity incentives are associated with declines in cash effective tax rates. We also identify CEO equity sales as the underlying economic mechanism. Further analyses indicate that tax avoidance is positively (negatively) associated with short-term (long-term) shareholder wealth in firms with myopic CEOs. We address endogeneity concerns with the use of equity vesting, and options acceleration before the adoption of FAS 123R as events plausibly exogenous to the current corporate tax planning environment.
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