[1] Is There a Pay for Fairness? JMP
Abstract: Isolating variation in personal income tax rates, I examine whether there is a component of fairness in CEO compensation. I find that in the presence of shareholder pay scrutiny, shocks where the CEO gains wealth are associated with a negative pay response and shocks where the CEO loses wealth are associated with a positive pay response. Both sets of shocks however are positively associated with firm performance and CEO effort. The results suggest that one purpose of failed executive pay proposals is to restore fairness.
[2] CEO Tax Burden and Corporate Risk Management (with Mansoor Afzali)
Abstract: We study how CEOs' personal tax incentives relate to corporate hedging decisions and firms' risk profiles. Unrealized capital gains tax liabilities, or tax burdens, make selling appreciated shares more costly, leaving CEOs more exposed to the macroeconomic risks embedded in their firms. We argue that corporate hedging provides a way to reduce this exposure without selling shares. Consistent with this argument, we find a positive association between CEOs' tax burdens and corporate hedging initiation and intensity. Difference-in-differences tests around state capital gains tax changes provide further support for this relation. Greater hedging among tax-burdened CEOs is associated with lower exposure to interest rate, foreign exchange rate, and commodity price risk. As this risk declines, CEO incentive alignment changes, with greater hedging associated with lower future Vega and, in the year immediately following, lower total compensation. Overall, our evidence suggests that personal tax lock-in is an important determinant of corporate hedging.
[3] The Effect of CEOs’ Capital Gains Taxes on Disclosure and Firm Value (with Mansoor Afzali and Gonul Colak)
Abstract: We investigate the effect of CEOs’ unrealized capital gains tax liabilities (tax burdens) on disclosure activities during conference calls. Consistent with the tax capitalization effect, CEOs with high tax burdens have incentives to disclose more information. Informative disclosure is associated with an increase in the firm’s absolute and relative firm value. To test the mechanism, we exploit a diverse set of state tax changes in a difference-in-differences model and find that tax cuts lead to a decrease in informative disclosure and consequently destroy firm value. Our findings hold significance for executive boards who should be aware of the role of personal taxes in shaping the firm’s information environment.
