Analyzing the Tax Benefits from Employee Stock Options
57 Pages Posted: 3 Mar 2008 Last revised: 3 Jan 2009
Employees tend to exercise stock options when corporate taxable income is high, shifting corporate tax deductions to years with higher tax rates. If firms paid employees the same dollar value in wages instead of stock options, we estimate that the average annual tax bill for large US companies would increase by $12.6 million, or 9.8%. Option tax benefits increase in the convexity of tax function. In addition, profitable firms can realize indirect tax benefits because stock options increase debt capacity. Although tax minimization is probably not the main motive for option grants, firms with larger potential tax benefits grant more options.
Keywords: stock options, capital structure, tax
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