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Taxing Options: Do Ceos Respond To Favorable Tax Treatment Of Stock Options?

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  • Martin Gritsch

    ()
    (William Patterson University)

  • Tricia Coxwell Snyder

    (William Patterson University)

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    Abstract

    CEO stock option compensation increased tremendously during the 1990s. During this period, the spread between the marginal income and capital gains tax rates increased substantially, creating the potential for tax avoidance. Using ExecuComp data from 1992-2000, we estimate CEOs’ responsiveness to changes in these tax rates. Our findings show that an increase in the marginal income and a decrease in the capital gains tax rate create a significant increase in stock option compensation. Furthermore, the impact of the marginal income tax rate is more than twice that of the capital gains tax rate, which contradicts previous studies.

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    File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume33/V33N3P343_357.pdf
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    Bibliographic Info

    Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

    Volume (Year): 33 (2007)
    Issue (Month): 3 (Summer)
    Pages: 343-357

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    Handle: RePEc:eej:eeconj:v:33:y:2007:i:3:p:343-357

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    Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA
    Phone: (201) 684-7346
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    Web page: http://www.ramapo.edu/eea/journal.html
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    1. Alan J. Auerbach & Jonathan M. Siegel, 2000. "Capital Gains Realizations of the Rich and Sophisticated," NBER Working Papers 7532, National Bureau of Economic Research, Inc.
    2. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
    3. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
    4. Dhillon, Upinder S. & Ramirez, Gabriel G., 1994. "Employee stock ownership and corporate control: An empirical study," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 9-25, January.
    5. Woodbury, Stephen A, 1983. "Substitution between Wage and Nonwage Benefits," American Economic Review, American Economic Association, vol. 73(1), pages 166-82, March.
    6. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
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