Explaining Firm Willingness To Forfeit Tax Deductions Under Internal Revenue Code Section 162(m): The Million-Dollar Cap

In this paper, the authors examine firm responses to Internal Revenue Code Section 162(m). In particular they examine firms' willingness to forfeit tax deductions, as well as the effect of Section 162(m) on the components and composition of compensation packages. Using a sample of firms over the five-year period subsequent to the effective date of Section 162(m), they find in almost 40 percent of firm year observations, firms forfeit deductions. They find that larger firms are more likely to forfeit tax deductions for executive compensation, as are firms with more affected ($1 million plus) executives, firms for which CEO compensation is high relative to performance, and firms that qualify their stock option plans.