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  5. Corporate Tax Breaks and Executive Compensation

Corporate Tax Breaks and Executive Compensation

Abstract

I analyze the effect of two corporate tax breaks, bonus depreciation and the Domestic Production Activities Deduction (DPAD), on executive compensation in publicly traded U.S. firms. I find both tax breaks significantly increase executive compensation. For every dollar a firm benefits from the tax breaks, compensation of the firm’s top five highest paid executives increases by 17 to 25 cents. The tax breaks increase compensation primarily in firms with weaker governance structures, suggesting the compensation response is driven by executive rent extraction.

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