After the 2006 corporate tax law revision in Japan, regular fixed, pre-notified, and performance-based remunerations are designated as deductible expenses. The remaining remuneration is non-deductible. Performance-related remuneration paid by a domestic corporation that meets specific conditions is deductible unless a portion of the remuneration is unreasonably expensive. The 2017 corporate tax law reform extended the definition of performance-based pay. This study uses the 2017 corporate tax law reform to expand the definition of deductible performance-based pay as an exogenous shock. This is the main finding of this study. The number of firms accepting performance-related executive pay has increased because of the 2017 corporate tax law reforms. However, no evidence exists regarding investors welcoming reforms or increases in executive compensation. This can be explained by the efficient contracting theory. This study contributes to existing literature in several ways. First, it contributes to the literature on corporate taxes and executive compensation by focusing on Japanese events. The law reform was unique because it expanded tax deductions for executive compensation. Second, it elucidates the effects of revisions on corporate behaviour in the corporate governance literature. Finally, this study provides practical implications for Asian regulators and rule-making institutions where corporate governance is still developing.

Keywords:
Executive compensation
Performance-based pay
Corporate tax law reform
Japan

*Corresponding Author.
E-mail address: yanagida.t@rs.tus.ac.jp