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The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOs

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  • KENNETH J. KLASSEN
  • AMIN MAWANI

Abstract

This study explores the effects of financial and tax reporting incentives on options granted to chief executive officers in Canada. Extant studies with a similar objective (Yermack 1995; Matsunaga 1995) explore predominantly nonqualified U.S. option grants that are deductible to the extent that the options are in the money at the time of exercise. In contrast, Canadian firms do not get a tax deduction for their stock option grants at any time. In both countries, no expense is recorded for financial reporting purposes. As a result, the financial reporting and tax reporting trade†off is more pronounced in the Canadian setting of this study compared with the U.S. setting. We measure option granting behavior as the ratio of the Black†Scholes value of stock option grants to the sum of cash compensation and the value of stock option grants. Using a sample of 806 firm†year observations during the period 1993†95, we find that observed option grants are significantly correlated with proxies for short†run financial reporting incentives. We also find evidence that option granting behavior is correlated with proxies for tax incentives.

Suggested Citation

  • Kenneth J. Klassen & Amin Mawani, 2000. "The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOs," Contemporary Accounting Research, John Wiley & Sons, vol. 17(2), pages 227-262, June.
    • Handle: RePEc:wly:coacre:v:17:y:2000:i:2:p:227-262
    DOI: 10.1506/GJM7-MUXJ-7QAE-CULW
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    1. Habib Jouber & Hamadi Fakhfakh, 2011. "Does CEOs Performance-based Compensation Waits on Shareholders? A Cross National Analysis," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 2(3), pages 68-82, August.
    2. Emmanuel Saez & Michael R. Veall, 2003. "The Evolution of High Incomes in Canada, 1920-2000," Quantitative Studies in Economics and Population Research Reports 382, McMaster University.
    3. KangYoung Lee & SungMan Yoon, 2020. "Managerial Ability and Tax Planning: Trade-Off between Tax and Nontax Costs," Sustainability, MDPI, vol. 12(1), pages 1-13, January.
    4. Habib Jouber, 2016. "The relationship between CEO performance-based compensation and shareholders value creation: a cross national analysis," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 8(1), pages 1-22.
    5. Liljeblom, Eva & Pasternack, Daniel & Rosenberg, Matts, 2011. "What determines stock option contract design?," Journal of Financial Economics, Elsevier, vol. 102(2), pages 293-316.
    6. Paul André & M. Martin Boyer & Robert Gagné, 2002. "Do CEOs Exercise Their Stock Options Earlier than Other Executives?," CIRANO Working Papers 2002s-71, CIRANO.
    7. Eichfelder, Sebastian & Jacob, Martin & Kalbitz, Nadine & Wentland, Kelly, 2023. "How do corporate tax rates alter conforming tax avoidance?," arqus Discussion Papers in Quantitative Tax Research 277, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Compton, Ryan & Sandler, Daniel & Tedds, Lindsay M., 2010. "Backdating, tax evasion, and the unintended consequences of Canadian tax reform," MPRA Paper 39788, University Library of Munich, Germany.
    9. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, vol. 95(3), pages 831-849, June.
    10. Kou, Zonglai & Tang, Yue & Wu, Hong & Zhou, Min, 2023. "Ownership, volatility, and equity incentives: Theory and evidence from listed companies in China," Economic Modelling, Elsevier, vol. 128(C).
    11. Eichfelder, Sebastian & Jacob, Martin & Kalbitz, Nadine & Wentland, Kelly, 2020. "Tax-induced earnings management and book-tax conformity: International evidence from unconsolidated accounts," arqus Discussion Papers in Quantitative Tax Research 252, arqus - Arbeitskreis Quantitative Steuerlehre.
    12. Compton, Ryan & Sandler, Daniel & Tedds, Lindsay M., 2010. "Options backdating: a Canadian perspective," MPRA Paper 39787, University Library of Munich, Germany.
    13. Kiridaran Kanagaretnam & Gerald Lobo & Robert Mathieu, 2012. "CEO stock options and analysts’ forecast accuracy and bias," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 299-322, April.
    14. Seppo Ikaheimo & Nuutti Kuosa & Vesa Puttonen, 2006. "'The True and Fair View' of Executive Stock Option Valuation," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 351-366.
    15. Kiridaran Kanagaretnam & Gerald Lobo & Emad Mohammad, 2009. "Are Stock Options Grants to CEOs of Stagnant Firms Fair and Justified?," Journal of Business Ethics, Springer, vol. 90(1), pages 137-155, November.
    16. Amin Mawani, 2007. "Simulating Firm-Specific Corporate Marginal Tax Rates in a Canadian Context," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 77-96, March-Jun.
    17. Liqiang Chen & Hong Fan & Xiaofei Song, 2023. "Impact of professor‐directors on Chinese firms' environmental performance," International Review of Finance, International Review of Finance Ltd., vol. 23(4), pages 696-720, December.

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