Does tax refund policy boost executive compensation?

Abstract

Tax reforms have a profound impact on corporate compensation. While existing research has extensively examined the effects of tax cuts and breaks on corporate compensation, the relationship between tax refunds and executive compensation remains largely unexplored. To address this gap, this paper employs a difference-in-differences approach to investigate the causal effect of China’s value-added tax credit refund policy on executive compensation. The findings reveal that the tax refund policy increases executive compensation, primarily by enhancing net income, which lays the financial foundation for higher executive compensation. These effects also exhibit heterogeneity across corporate regions, life cycle stages, ownership structures, and executive categories. This paper is the first to explore the relationship between tax refunds and executive compensation, providing valuable insights into how external tax policies influence corporate internal incentive structures.