Cancellation of Executive Stock Options: Tax and Accounting Income Considerations

46 Pages Posted: 27 Feb 2002

See all articles by Amin Mawani

Amin Mawani

York University - Department of Accounting

Date Written: January 2002

Abstract

Canadian firms face a trade-off between reporting higher accounting income and paying lower taxes that arises from their ability to cancel in-the-money executive stock options and making a substitute cash payment to the executive instead of issuing shares. Firms' trade-off hypotheses are operationalized in a multilateral framework and empirically tested using insider trading data. The multilateral approach is designed to control for the incentive effects of alternative compensation schemes and to determine the cancellation payment that keeps the executive indifferent between receiving cash or shares. The results show that firms consider both taxes and financial reporting costs - separately as well as simultaneously - in determining their option cancellation behavior.

JEL Classification: M41, H25, J33, G13

Suggested Citation

Mawani, Amin, Cancellation of Executive Stock Options: Tax and Accounting Income Considerations (January 2002). Available at SSRN: https://ssrn.com/abstract=299925 or http://dx.doi.org/10.2139/ssrn.299925

Amin Mawani (Contact Author)

York University - Department of Accounting ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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