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Employee Stock Options, Corporate Taxes and Debt Policy

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  • John R. Graham
  • Mark H. Lang
  • Douglas A. Shackelford

Abstract

We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, the median marginal tax rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect marginal tax rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt tax shields that can affect corporate policies. We find evidence consistent with option deductions substituting for interest deductions in corporate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9289.

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Date of creation: Oct 2002
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Publication status: published as Graham, John R., Mark H. Lang and Douglas A. Shackelford. "Employee Stock Options, Corporate Taxes, And Debt Policy," Journal of Finance, 2004, v59(4,Aug), 1585-1618.
Handle: RePEc:nbr:nberwo:9289

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  1. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  2. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  3. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
  4. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  6. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  7. Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
  8. Core, John E. & Guay, Wayne R., 2001. "Stock option plans for non-executive employees," Journal of Financial Economics, Elsevier, vol. 61(2), pages 253-287, August.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  10. Kahle, Kathleen M. & Shastri, Kuldeep, 2005. "Firm Performance, Capital Structure, and the Tax Benefits of Employee Stock Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 135-160, March.
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