Book-tax differences: are they affected by equity-based compensation?

Abstract

Purpose

This study aims to investigate the moderating effect of equity-based compensation on the sources of book-tax differences. The authors investigate whether equity-based compensation affects the association between book-tax differences and tax planning, and the association between book-tax differences and earnings management.

Design/methodology/approach

The authors use a sample of 9,024 firm-year observations (913 firms) spanning the period 1992-2011, obtained from ExecuComp and Compustat. They estimate cross-sectional regressions of the proxy for tax planning, discretionary accruals and their interactions with equity-based compensation on book-tax differences.

Findings

The authors find that tax planning-related book-tax differences increase as the equity-based pay of executives does, and that earnings management-related book-tax differences decrease as the equity-based pay of executives increases. The results are robust across three alternative measures of tax planning.

Originality/value

Equity-based compensation plays an important role in managerial discretion on tax planning and earnings management. The findings suggest that, although equity incentives promote a high level of both tax planning and earnings management, they motivate managers to constrain the level of earnings management to avoid larger book-tax differences.

Citation

Xian, C., Sun, F. and Zhang, Y. (2015), "Book-tax differences: are they affected by equity-based compensation?", Accounting Research Journal, Vol. 28 No. 3, pp. 300-318. https://doi.org/10.1108/ARJ-12-2013-0088