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Analyzing the Tax Benefits from Employee Stock Options

Author

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  • ILONA BABENKO
  • YURI TSERLUKEVICH

Abstract

Employees tend to exercise stock options when corporate taxable income is high, shifting corporate tax deductions to years with higher tax rates. If firms paid employees the same dollar value in wages instead of stock options, the average annual tax bill for large U.S. companies would increase by $12.6 million, or 9.8%. These direct tax benefits of options increase in the convexity of the tax function. In addition, profitable firms can realize indirect tax benefits because stock options increase debt capacity. Although tax minimization is probably not the main motive for option grants, firms with larger potential tax benefits grant more options.

Suggested Citation

  • Ilona Babenko & Yuri Tserlukevich, 2009. "Analyzing the Tax Benefits from Employee Stock Options," Journal of Finance, American Finance Association, vol. 64(4), pages 1797-1825, August.
  • Handle: RePEc:bla:jfinan:v:64:y:2009:i:4:p:1797-1825
    DOI: 10.1111/j.1540-6261.2009.01480.x
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    Cited by:

    1. Allen, Jason & Thompson, James R., 2019. "Variable pay: Is it for the worker or the firm?," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 551-566.
    2. Robin Döttling & Tomislav Ladika & Enrico Perotti, 2016. "The (Self-)Funding of Intangibles," Tinbergen Institute Discussion Papers 16-093/IV, Tinbergen Institute.
    3. Hongfeng Sun & Chang Liu, 2023. "Employee Stock Ownership Plans and Corporate Environmental Performance: Evidence from China," IJERPH, MDPI, vol. 20(2), pages 1-19, January.
    4. Chang, Xin & Fu, Kangkang & Low, Angie & Zhang, Wenrui, 2015. "Non-executive employee stock options and corporate innovation," Journal of Financial Economics, Elsevier, vol. 115(1), pages 168-188.
    5. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
    6. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2015. "Executive Compensation and Risk Taking," Review of Finance, European Finance Association, vol. 19(6), pages 2139-2181.
    7. Martin Widdicks & Jinsha Zhao, 2014. "A Model of Equity Based Compensation with Tax," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1002-1041, September.
    8. Chen, Tsung-Kang & Liao, Hsien-Hsing & Chi, Cheng-Ming, 2014. "The economic consequences of regulatory changes in employee stock options on corporate bond holders: SFAS No.123R and structural credit model perspectives," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 381-394.
    9. Bird, Andrew, 2018. "Taxation and executive compensation: Evidence from stock options," Journal of Financial Economics, Elsevier, vol. 127(2), pages 285-302.
    10. Dunli Zhang & Ting Zhang & Guanghua Ma, 2020. "Can non‐executive equity incentives reduce internal control ineffectiveness? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4467-4496, December.
    11. Jan Zabojnik, 2014. "Stock-based Compensation Plans And Employee Incentives," Working Paper 1325, Economics Department, Queen's University.
    12. Sun, Qi & Xiaolan, Mindy Z., 2019. "Financing intangible capital," Journal of Financial Economics, Elsevier, vol. 132(2), pages 472-496.
    13. Sun, Lei & Widdicks, Martin, 2016. "Why do employees like to be paid with Options?: A multi-period prospect theory approach," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 106-125.
    14. Mindy X. Zhang & Qi Sun, 2016. "Financing Intangible Capital," 2016 Meeting Papers 230, Society for Economic Dynamics.
    15. Devos, Erik & Rahman, Shofiqur, 2023. "Does labor unemployment insurance affect corporate tax aggressiveness?," International Review of Financial Analysis, Elsevier, vol. 90(C).
    16. Xu, Xixiong & Duan, Lingling, 2023. "Confucianism and employee stock ownership plans: Evidence from Chinese listed firms," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 859-872.

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