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Hedging Employee Stock Options, Corporate Taxes, and Debt

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  • Amromin, Gene
  • Liang, Nellie

Abstract

This study explores two effects of employee stock options on tax incentives to issue debt. The deduction of option from taxable income creates a non-debt tax shield, reducing the incentive to issue debt. In contrast, the grant of options also creates a demand for hedging unexpected stock price increases, and firms have a tax-based incentive to hedge by borrowing to repurchase shares. Empirical tests for a sample of large S&P 500 firms from 1995 to 2001 present evidence consistent with both effects, and the increase in debt through hedging more than offsets the effect from reducing marginal tax rates for high tax rate firms.

Suggested Citation

  • Amromin, Gene & Liang, Nellie, 2003. "Hedging Employee Stock Options, Corporate Taxes, and Debt," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 513-533, September.
    • Handle: RePEc:ntj:journl:v:56:y:2003:i:3:p:513-33
    DOI: 10.17310/ntj.2003.3.05
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    References listed on IDEAS

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    1. John R. Graham & Mark H. Lang & Douglas A. Shackelford, 2002. "Employee Stock Options, Corporate Taxes and Debt Policy," NBER Working Papers 9289, National Bureau of Economic Research, Inc.
    2. Cuny, Charles J. & Jorion, Philippe, 1995. "Valuing executive stock options with endogenous departure," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 193-205, September.
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