Explaining firm willingness to forfeit tax deductions under Internal Revenue Code Section 162(m): The million-dollar cap

We examine firms' willingness to forfeit tax deductions in response to Internal Revenue Code Section 162(m). Using a sample of firms over the five-year period subsequent to the effective date of Section 162(m), we find firms forfeit deductions in almost 40% of firm year observations. In particular we find that firms with higher recontracting costs are more likely to forfeit deductions, while firms with higher tax benefits and political costs are more likely to fully preserve deductions. In documenting the willingness of corporations to forfeit deductions,we add to the body of evidence that suggests Section 162(m) is not totally successful in using tax policy to curb executive pay.