Employee Stock Options and Taxes

21 Pages Posted: 15 Apr 2005

See all articles by Courtney H. Edwards

Courtney H. Edwards

University of North Carolina - Accounting Area; University of North Carolina (UNC) at Chapel Hill - Accounting Area

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)

Date Written: November 2004

Abstract

In this paper, we investigate the effect of stock options on the tax position of the firm. We argue that option tax deductions can significantly affect a firm's marginal tax rate and that the effect is masked by current financial reporting rules. We present an approach for factoring in option deductions in assessing a firm's tax position and document that the effect can be substantial. In particular, many firms that appear to be profitable and face high income tax burdens (based on public financial statement data) actually pay relatively little in taxes. We provide evidence that the effect of options on taxes may help to explain managerial decisions such as why apparently profitable firms carry so little debt, lease rather than purchase, and out-source tax-advantaged activities, such as research and development, to syndicated partnerships.

Keywords: Employee stock options, corporate tax rate, capital structure, debt ratio, cash flows

JEL Classification: H2, M41, M33, G31, G32

Suggested Citation

Edwards, Courtney H. and Graham, John Robert and Lang, Mark H. and Shackelford, Douglas A., Employee Stock Options and Taxes (November 2004). Available at SSRN: https://ssrn.com/abstract=688444 or http://dx.doi.org/10.2139/ssrn.688444

Courtney H. Edwards

University of North Carolina - Accounting Area ( email )

University of North Carolina at Chapel Hill
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3560 (Phone)
919-962-4727 (Fax)

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

John Robert Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

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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