CEO Severance Agreements and Tax Avoidance

This study investigates the association between CEO severance agreements and corporate tax avoidance. Severance agreements, by providing executives with additional compensation when there is a change in employment status, should serve to encourage additional risk-taking, as reflected by increased tax avoidance activities. Using a large sample of aggregate compensation data, I find some evidence of a relation between the presence of a CEO severance agreement and tax avoidance. Using a smaller sample of hand-collected data, I find a significant negative relation between the magnitude of cash severance pay and tax avoidance and a significant positive relation between the magnitude of equity severance pay and tax avoidance. Overall, this study provides evidence that the structure and magnitude of severance agreements are related to tax avoidance.