ABSTRACT: This study extends prior research on the tax-motivated substitution of employee stock options (ESOs) for debt by providing evidence on the manner in which the tax status of the firm and ESOs interact to influence debt policy. Using tobit regression and a sample of 13,345 firm-year observations over the period 1993–2004, we find that firms whose expected marginal tax rates are likely to be affected by non-debt tax shields (i.e., tax-sensitive firms) substitute ESOs for debt. In contrast, we find no association between debt and ESOs for firms that are likely able to fully utilize all available tax shields without affecting their expected marginal tax rates due to their high level of profitability for tax purposes (i.e., tax-insatiable firms). These results suggest that tax status impacts the association between debt and ESOs such that the two tax shields are not substitutes for all groups of firms across tax status categories.
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Spring 2008
Research Article|
March 01 2008
The Impact of Tax Status on the Relation between Employee Stock Options and Debt
Online ISSN: 1558-8017
Print ISSN: 0198-9073
American Accounting Association
2008
Journal of the American Taxation Association (2008) 30 (1): 55–75.
Citation
Jagadison K. Aier, Jared A. Moore; The Impact of Tax Status on the Relation between Employee Stock Options and Debt. Journal of the American Taxation Association 1 March 2008; 30 (1): 55–75. https://doi.org/10.2308/jata.2008.30.1.55
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