Working Paper: NBER ID: w9289
Authors: 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, the median marginal tax rate is 31 percent when option deductions are ignored but falls to 5 percent when one accounts for the deductions. For S&P firms, however, option deductions do not affect marginal tax rates to a large degree. In the spirit of DeAngelo and Masulis (1980), option deductions are important nondebt tax shields that can affect corporate policies. We find evidence consistent with option deductions substituting for interest deductions in corporate capital structure decisions. This evidence explains in part why some firms appear to be underlevered.
Keywords: Employee Stock Options; Corporate Taxes; Debt Policy
JEL Codes: H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employee stock option deductions (M52) | corporate taxable income (K34) |
| corporate taxable income (K34) | median marginal tax rate (MTR) (H21) |
| employee stock option deductions (M52) | median marginal tax rate (MTR) (H21) |
| employee stock option deductions (M52) | debt policy (H63) |
| corporate taxable income (K34) | debt policy (H63) |
| employee stock option deductions (M52) | corporate financing decisions (G32) |