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Tax Effects on the Value of Incentive Stock Options (ISOs) and the Decision to Go Public

Author

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  • Thomas A. Rhee

    (California State University, Long Beach)

Abstract

The incentive stock options (ISOs) are similar to the regular stock call options. However, when one considers various taxing laws regarding the ISO stocks, the ISOs have unique features differentiated from the regular stock call options. In general, no income from ISOs is realized, for tax purposes, either upon the grant or exercise of the ISOs, until the ISO stock is actually sold. This poses an interesting question to executives with ISOs about when the firm should go public. In fact, a significant wealth can accrue to executives with the ISO stocks, when the firm’s stock becomes publicly traded. Therefore, any changes in the tax law may affect the financial value of ISOs and also the firm’s decision to go public. The present paper examines the valuation process of the ISOs and investigates the economic effects of tax law changes on “going public.” The result suggests that the 1986 TRA may have delayed the firm’s decision to go public, while the U.S. Administration’s recent individual income tax hike to finance the government deficit may somewhat encourage the firm’s activity to go public.

Suggested Citation

  • Thomas A. Rhee, 1991. "Tax Effects on the Value of Incentive Stock Options (ISOs) and the Decision to Go Public," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(2), pages 101-113, Winter.
    • Handle: RePEc:pep:journl:v:1:y:1991:i:2:p:101-113
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    References listed on IDEAS

    as
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    3. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Incentives ; Stock Options ; Stocks; Tax Effects; ISO; IPO;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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