The Choice of Incentive Stock Options vs. Nonqualified Stock Options: A Marginal Tax Rate Perspective

Posted: 11 Nov 1996

See all articles by Jeffrey R. Austin

Jeffrey R. Austin

Southern Methodist University (SMU) - Accounting Department

Jennifer J. Gaver

University of Georgia - J. M. Tull School of Accounting, Terry College of Business

Kenneth M. Gaver

University of Georgia - J.M. Tull School of Accounting

Date Written: July 1996

Abstract

Compensation committees seeking to minimize the joint tax liability of executives and their firms will grant tax-qualified Incentive Stock Options (ISOs) when the corporate marginal tax rate is low. Otherwise, nonqualified stock options are tax-advantageous. We test the proposition that tax motivations determine the choice between ISOs and nonqualified options by examining a sample of 364 option grants by 195 firms during the 1981 to 1984 period. Our tests employ four alternative measures of tax status, ranging from a simple dummy variable based on the firm's net operating loss carryforward position to a sophisticated simulation of expected exercise year and projected marginal tax rate in that year. We find that the univariate relation between tax status and option granting behavior is insignificant for all four tax variables. However, when we control for firm size in a multivariate logistic regression, we find that one of the four variables is significant in the direction predicted by the tax hypothesis. Interestingly, it is one of the simpler measures. Our results indicate that tax considerations offer only a partial explanation for the ISO/nonqualified option choice.

JEL Classification: J33, K34, G34

Suggested Citation

Austin, Jeffrey R. and Gaver, Jennifer J. and Gaver, Kenneth M., The Choice of Incentive Stock Options vs. Nonqualified Stock Options: A Marginal Tax Rate Perspective (July 1996). Available at SSRN: https://ssrn.com/abstract=8160

Jeffrey R. Austin (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States

Jennifer J. Gaver

University of Georgia - J. M. Tull School of Accounting, Terry College of Business ( email )

233 Brooks Hall
Athens, GA 30602-6252
United States
706-542-3699 (Phone)
706-542-3630 (Fax)

Kenneth M. Gaver

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-3620 (Phone)
706-542-3630 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
3,040
PlumX Metrics