Accounting for the Tax Benefits of Employee Stock Options and Implications for Research

University of Washington Working Paper

28 Pages Posted: 29 May 2001

See all articles by Terry J. Shevlin

Terry J. Shevlin

University of California-Irvine

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 2001

Abstract

This paper explains firm disclosures of the tax benefits of employee stock options and discusses the implications of this disclosure for academic research studies and financial statement users. We do this in order to show that there are important implications for empirical research studies and inferences regarding tax burdens. The effects of this accounting have not often been taken into account in empirical research yet it may impact the inferences made from the studies. We find that firm disclosures are not always clear as to the amount of the corporate tax benefits from the exercise of stock options. In addition, in many cases, firms' reported effective tax rates are overstated as are estimates of marginal tax rates and tax burdens using financial statement disclosures. This study is important because it explains the accounting for the tax benefits of stock options, describes the problems this accounting may cause in empirical studies and for financial statement users, and provides some suggestions on adjusting for this accounting to more correctly estimate tax rates and burdens.

Keywords: Employee stock options, Tax benefits, Effective tax rates, Marginal tax rate

JEL Classification: M41, H25, G39

Suggested Citation

Shevlin, Terry J. and Hanlon, Michelle, Accounting for the Tax Benefits of Employee Stock Options and Implications for Research (April 2001). University of Washington Working Paper. Available at SSRN: https://ssrn.com/abstract=271310 or http://dx.doi.org/10.2139/ssrn.271310

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-668
Cambridge, MA 02142
United States
617-253-9849 (Phone)

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