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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, including the effect of options reduces the estimated median marginal tax rate from 31% to 5%. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt. Copyright 2004 by The American Finance Association.

Suggested Citation

  • John R. Graham & Mark H. Lang & Douglas A. Shackelford, 2004. "Employee Stock Options, Corporate Taxes, and Debt Policy," Journal of Finance, American Finance Association, vol. 59(4), pages 1585-1618, August.
  • Handle: RePEc:bla:jfinan:v:59:y:2004:i:4:p:1585-1618
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, April.
    5. 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.
    6. 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 1421-1460, December.
    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. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    10. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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