NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Employee Stock Options, Corporate Taxes and Debt Policy

John R. Graham, Mark H. Lang, Douglas A. Shackelford

NBER Working Paper No. 9289
Issued in October 2002
NBER Program(s):   PE

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.

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Document Object Identifier (DOI): 10.3386/w9289

Published: Graham, John R., Mark H. Lang and Douglas A. Shackelford. "Employee Stock Options, Corporate Taxes, And Debt Policy," Journal of Finance, 2004, v59(4,Aug), 1585-1618.

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