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Taxation and the Early Exercise of Call Options

  • Karen Alpert
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    Prior studies of call option early exercise either ignore personal taxes or simplify the impact of taxation. When making an early exercise decision, the option holder should compare the after-tax cash flows from exercise with the after-tax cash flows from selling the option. Due to the differential taxation of option and share transactions, it is possible for exercise to be wealth-maximizing after tax even when it would not be the rational decision on a before-tax basis. By incorporating personal taxes on the option, underlying share and dividend this paper shows that tax can potentially explain a large portion of early exercise events classified as 'irrational' in previous studies. Copyright (c) 2010 Blackwell Publishing Ltd.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-5957.2010.02183.x
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    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 37 (2010-06)
    Issue (Month): 5-6 ()
    Pages: 715-736

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    Handle: RePEc:bla:jbfnac:v:37:y:2010-06:i:5-6:p:715-736
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