The effect of Taxes on Executive Compensations

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We investigated the effect of taxes on executive compensations. We especially focus on the system of stock option. This paper empirically examines the relation between the use of derivatives and the risk level of firms in a sample of 431 large Japanese nonfinancial firms. Previous studies investigating whether firms systematically reduce or increase their risk with derivatives show that firms reduce their risk. By contrast, this paper shows that the use of derivatives increases total risk and firm-specific risk. However, the magnitude of the increase is not economically significant. Further analysis provides some evidence on the association between derivatives and stock options. The results show that there is a positive relation between the use of derivatives and stock options. In addition, firms introducing stock options invest in R&D activities to a greater extent than firms that do not introduce stock options. These findings suggest that Japanese firms use derivatives to hedge homog … More eneous risk and adopt stock option compensation to take core-business risk.Additionally, we investigated another setting whether taxes affect firm's managerial decision-making. We analyze the effect of taxes on transaction structure of corporate acquisitions in Japan. Acquirers and target shareholders can exchange target stock for cash or for acquire stock. In stock to cash transactions, target shareholders have to pay tax on the capital gain, taxable transaction. By contrast, in stock to stock transactions target shareholders doesn't have to pay and can defer tax on the capital gain, non-tax transaction. This research provides an empirical evidence that acquires with tax loss carryover tend to choice the non-tax transaction structure. We predicted that target firms with many individual shareholders tend to choice the taxable transaction structure because of lower tax rate than corporate shareholders on capital gains. But we can't confirm the prediction.These researches are the almost first empirical analysis of the relation between Japanese corporate decision-making and tax system. We contribute to demonstrate the effect of taxes on taxpayers' activities in Japan. Less