Firm Performance, Capital Structure and the Tax Benefits of Employee Stock Options

Posted: 28 Jul 2004

See all articles by Kathleen M. Kahle

Kathleen M. Kahle

University of Arizona - Department of Finance; European Corporate Governance Institute (ECGI)

Kuldeep Shastri

University of Pittsburgh - Finance Group

Abstract

This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

JEL Classification: G32, J33

Suggested Citation

Kahle, Kathleen M. and Shastri, Kuldeep, Firm Performance, Capital Structure and the Tax Benefits of Employee Stock Options. Available at SSRN: https://ssrn.com/abstract=569802

Kathleen M. Kahle

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kuldeep Shastri (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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