Tax Status and the Impact of SFAS No. 123R on Capital Structure

Abstract:     
Because Employee Stock Options (ESOs) provide a tax-deduction and generate cash for a firm, they have been shown to be a substitute for debt. Aier and Moore (2008) found a negative association between debt and ESOs for tax-sensitive firms (those firms whose marginal tax rate was likely to be affected by the deductibility of ESOs), but no association for tax insatiable firms (who had so much taxable income that their marginal tax rate would likely not be affected by ESOs). SFAS No. 123R changed the reporting requirement for ESOs. Prior to enactment, ESOs could be disclosed in the footnotes of the financial statements. Upon enactment, ESOs were required to be expensed in the body of the financial statements. This study will attempt to see if the enactment of SFAS No. 123R changed the relationship between ESOs and debt, and if that change, if any, was different based on the tax status of the firm.

Keywords: employee stock options, SFAS No. 123R, tax status

JEL Classifications: M44, H24

Working Paper Series