Compensation in the Post-FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty

Jennifer L. Brown, Katharine D Drake, Melissa A. Martin

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Academic and anecdotal evidence indicates that incentive systems often provide short-term payouts without regard for long-term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance-based pay for uncertainty. We find managers' bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post-FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre-FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post-FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post-FIN No. 48 period.

Original languageEnglish (US)
JournalContemporary Accounting Research
DOIs
StateAccepted/In press - 2015

Fingerprint

Bonus
Contracting
Tax
Uncertainty
Payout
Income tax
Incentive systems
Board performance
Disclosure
Cash
Managers
Financial reporting
Tax avoidance
Firm risk

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Compensation in the Post-FIN 48 Period : The Case of Contracting on Tax Performance and Uncertainty. / Brown, Jennifer L.; Drake, Katharine D; Martin, Melissa A.

In: Contemporary Accounting Research, 2015.

Research output: Contribution to journalArticle

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