A Empirical Study On The Relationship Between High Incentive And Tax Avoidance

Nowadays, more and more companies have considered the importance of tax. They begin to consider the effect of taxes on financing choices, organizational form and restructuring decisions, payout policy, compensation policy and risk management decisions. What induces firms and managers to engage in transactions designed solely to minimize corporate tax obligations? Alternatively, why don't all firms engage in these transactions? How are transactions that are motivated by tax savings affected by high powered incentive of manager?This paper analyzes the links between tax avoidance and the growths of high powered incentives for managers. We introduce an empirical measure of corporate tax avoidance - the component of the book-tax gap not attributable to earning management, and investigate the link between tax avoidance and firm value. Then, we investigate the relationship between tax avoidance and incentive compensation.This paper takes State - owned Listed Company and Private Listed Company over the time framework between 1998 and 2007 as research objects and using the pooled least squares regression and the panel data model (fixed effects–random effects model) to makes analysis on this question. We will investigate that how will these two companies trade-off between tax saving and non-tax costs and how will they react with tax avoidance as the increase in incentive compensation.Through empirical research, we find that there is a negative effect between high powered incentives and tax avoidance. That is to say, increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. This paper shows that this negative effect in Private Listed Company is more significant than that in State-owned Listed Company.