The Influence of Senior Executive Compensation on Corporate Tax Avoidance of European Publicly Listed Firms

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This study investigates the influence of total senior executive compensation on corporate tax avoidance of European publicly listed firms. This study hypothesizes that total senior executive compensation positively (negatively) influences corporate tax avoidance when the marginal net benefits of corporate tax avoidance are positive (negative). Besides, this study hypothesizes that the proportion of strictly independent board members strengthens both the positive and negative relationship between total senior executive compensation and corporate tax avoidance. The data consists of 387 European publicly listed firms and 15 years from 2007 to 2021. In the main analysis, four different panel-corrected standard error models (PCSE) are used to estimate the impact of total senior executive compensation on corporate tax avoidance. These four models use different measures of corporate tax avoidance. Based on the PCSE model with the most accurate measure of corporate tax avoidance (the residual book-tax-gap), the results indicate that all hypotheses are supported. Therefore, this study provides evidence for the rationale that corporate governance mechanisms alleviate agency problems at relatively low and high levels of corporate tax avoidance activity. Two different robustness checks lead to the same conclusion. Besides, the study’s limitations and suggestions for future research are provided.
Faculteit der Managementwetenschappen