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Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison

Author

Listed:
  • Compton, Ryan
  • Nicholls, Christopher C.
  • Sandler, Daniel
  • Tedds, Lindsay

Abstract

This paper examines the pre- and post-tax returns to Canadian and US executives who receive backdated stock options (that appear to be at-the-money options) compared to currently-dated in-the-money options. We begin by comparing the Black-Scholes value of backdated at-the-money options to currently-dated in-the-money options (with the same strike price as the back-dated options). We then contrast the pre- and post-tax returns of such options on the assumption that the options are eventually exercised at a time when the options are in-the-money and the shares sold (either immediately or later) at a profit. We demonstrate that a Canadian executive can earn a significantly larger after-tax return from backdated options compared to a US executive due to the favourable Canadian tax treatment of executive options relative to their treatment in the United States. The comparison suggests that the personal tax regime may have had an impact on the desire to receive backdated options in lieu of other forms of compensation in Canada but not so in the United States.

Suggested Citation

  • Compton, Ryan & Nicholls, Christopher C. & Sandler, Daniel & Tedds, Lindsay, 2011. "Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison," MPRA Paper 39789, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39789
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    File URL: https://mpra.ub.uni-muenchen.de/39789/1/MPRA_paper_39781.pdf
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    References listed on IDEAS

    as
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    5. Ertimur, Yonca & Ferri, Fabrizio & Maber, David A., 2012. "Reputation penalties for poor monitoring of executive pay: Evidence from option backdating," Journal of Financial Economics, Elsevier, vol. 104(1), pages 118-144.
    6. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity‐Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, June.
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    8. Dhaliwal, Dan & Erickson, Merle & Heitzman, Shane, 2009. "Taxes and the backdating of stock option exercise dates," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 27-49, March.
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    Cited by:

    1. Tedds, Lindsay M. & Compton, Ryan & Morrison, Caitlin & Nicholls, Christopher & Sandler, Daniel, 2012. "Learning to play by the disclosure rules: accuracy of insider reports in Canada, 1996-2010," MPRA Paper 39793, University Library of Munich, Germany.

    More about this item

    Keywords

    Executive compensation; stock options; personal income tax;

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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