The Role of Tax Regulation and Compensation Contracts in the Decision to Voluntarily Expense Employee Stock Options
24 Pages Posted: 5 Oct 2010
Date Written: 2007
We show that firms with executive bonuses that qualify for deduction under Internal Revenue Code Section 162(m) were less likely to expense stock option compensation (SOC) in 2002. Additionally, the more likely it is that a qualified firm will incur re-contracting costs, the less likely it is that the firm will expense SOC. CEOs of qualified firms that also expense SOC receive smaller bonuses than CEOs of expensing firms that are not qualified under 162(m), and the lower 162(m) bonuses are not offset by higher SOC. Our results suggest that 162(m) tax incentives are an important determinant of the decision to expense SOC.
Keywords: Management contracting, taxes; stock options, shareholder voting, Section 162(m)
JEL Classification: M4, J33, H25, G38
Suggested Citation: Suggested Citation