Employee Stock Options, Corporate Taxes and Debt Policy

47 Pages Posted: 19 Oct 2002 Last revised: 19 Sep 2012

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Mark H. Lang

University of North Carolina at Chapel Hill

Douglas A. Shackelford

University of North Carolina Kenan-Flagler Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2002

Abstract

We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, the median marginal tax rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect marginal tax rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt tax shields that can affect corporate policies. We find evidence consistent with option deductions substituting for interest deductions in corporate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.

Suggested Citation

Graham, John Robert and Lang, Mark H. and Shackelford, Douglas A., Employee Stock Options, Corporate Taxes and Debt Policy (October 2002). NBER Working Paper No. w9289. Available at SSRN: https://ssrn.com/abstract=341857

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
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919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

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Mark H. Lang

University of North Carolina at Chapel Hill ( email )

Kenan-Flagler Business School
McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-1644 (Phone)
919-962-4727 (Fax)

Douglas A. Shackelford (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3197 (Phone)
919-962-4727 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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