The Valuation of Permanent and Temporary Book-Tax Differences of Firms Granting Employee Stock Options

35 Pages Posted: 16 Sep 2004

See all articles by Charles A. Barragato

Charles A. Barragato

Stony Brook University

Kathleen M. Weiden

Fairfield University - Dolan School of Business

Date Written: August 30, 2004

Abstract

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

Suggested Citation

Barragato, Charles A. and Weiden, Kathleen M., The Valuation of Permanent and Temporary Book-Tax Differences of Firms Granting Employee Stock Options (August 30, 2004). Available at SSRN: https://ssrn.com/abstract=590805 or http://dx.doi.org/10.2139/ssrn.590805

Charles A. Barragato

Stony Brook University ( email )

303 Harriman Hall
Stony Brook, NY 11794
United States
631-632-7999 (Phone)
631-632-9412 (Fax)

Kathleen M. Weiden (Contact Author)

Fairfield University - Dolan School of Business

Fairfield, CT 06430
United States
203-254-4000 ext 2160 (Phone)

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