The Impact of Tax Status on the Relation between Employee Stock Options and Debt

Posted: 3 Oct 2007

See all articles by JK Aier

JK Aier

George Mason University

Jared A. Moore

Oregon State University - College of Business

Abstract

This study extends prior research on the tax motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993-2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories.

Keywords: capital structure, corporate taxes, debt policy, employee stock options, option deductions

JEL Classification: G30, G32, H25, J33

Suggested Citation

Aier, Jagadison K and Moore, Jared A., The Impact of Tax Status on the Relation between Employee Stock Options and Debt. Journal of American Taxation Association, Vol. 30, No. 1, 2008. Available at SSRN: https://ssrn.com/abstract=1018978

Jagadison K Aier

George Mason University ( email )

4400 University Drive
Fairfax, VA 22030
United States

Jared A. Moore (Contact Author)

Oregon State University - College of Business ( email )

443 Austin Hall
Corvallis, OR 97331
United States
541-737-2517 (Phone)
541-737-4890 (Fax)

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