The Valuation of Permanent and Temporary Book-Tax Differences of Firms Granting Employee Stock Options
35 Pages Posted: 16 Sep 2004
Date Written: August 30, 2004
This study investigates the valuation implications of permanent and temporary book-tax differences of firms granting employee stock options. To conduct this investigation, we expand on the valuation model employed by Amir, Kirschenheiter and Willard (1997), and incorporate adjustments suggested by Hess and Luders (2001) to reflect the impact of stock-based compensation. We estimate permanent book-tax differences associated with stock options using firms' disclosures under SFAS No. 123, and in conjunction with firms' disclosures about deferred taxes (temporary book-tax differences) under SFAS No. 109, conduct value relevance tests. We predict and find evidence that deferred taxes recognized for financial accounting purposes and unrecognized permanent tax assets associated with stock options are both incrementally value relevant.
Keywords: Deferred taxes, value relevance, SFAS No. 109, share-based payments
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