Analyzing the Tax Benefits from Employee Stock Options

57 Pages Posted: 3 Mar 2008 Last revised: 3 Jan 2009

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Yuri Tserlukevich

Arizona State University (ASU)

Abstract

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

Suggested Citation

Babenko, Ilona and Tserlukevich, Yuri, Analyzing the Tax Benefits from Employee Stock Options. Journal of Finance, Forthcoming; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1101271

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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