Incentive

Double taxation

Principal–agent problem

Engineering

Philosophy

Stock (firearms)

Microeconomics

Accounting

Executive compensation

Stock options

Economics

Business

Corporate governance

Mechanical engineering

Management

Monetary economics

Public economics

Epistemology

Agency cost

Sociology

Corporate tax

Tax avoidance

Finance

Stakeholder

Agency (philosophy)

Shareholder

Social science

Journal of Management Studies

Infusing stakeholder agency theory with insights from behavioural agency theory, we describe a frame‐dependent relationship between CEO stock option incentives and tax avoidance. Our theoretical framework highlights the role of competing shareholder demands in providing a salient reference point for a CEO contemplating the implications of tax avoidance for their stock option wealth. In a study of 2,573 publicly listed U.S. firms between 1993 and 2014, we show that the implications of CEO stock option incentives are contingent on whether the firm’s effective tax rate is anticipated to be below or above the tax rate of peer firms – an outcome that the CEO can cast as balancing stakeholder demands. Consistent with our theoretical reasoning, we also show that, both above and below this reference point, the implications of option incentives for corporate tax avoidance are amplified by the level of activist institutional ownership and attenuated by the CEO’s ability to unwind their bond with shareholders through hedging. In doing so, our study offers an impetus for a broader stakeholder approach to governance research examining CEO incentive alignment.

Stakeholder Agency Relationships: CEO Stock Options and Corporate Tax Avoidance