Do Taxes Matter: Evidence of Individual and Corporate Tax Incentives on the Choice to Hold Shares Acquired from Exercise of Employee Stock Options

35 Pages Posted: 23 Jul 2009

See all articles by George Ryan Huston

George Ryan Huston

Texas Tech University - Area of Accounting

Thomas Joseph Smith

University of South Florida

Date Written: July 21, 2009

Abstract

This paper extends prior stock option literature by examining whether individual and corporate tax incentives are associated with the decision to hold shares acquired through option exercises. Aboody, Hughes, Liu, and Su (2008) refute the previously-held assumption that individuals immediately sell shares acquired through option exercise. We extend their work by focusing on the trade-off between tax incentives and the costs of holding, including liquidity constraints, opportunity costs, and future share price decline. We find that insiders hold shares for at least a year in 18.26 percent of exercises. Additionally, insiders are more likely to hold shares obtained through exercise of ISOs (specifically ISOs that are deeper in the money) relative to NQSOs, as ISOs allow for the transfer of pre-exercise gains from ordinary income to capital gain treatment. Finally, we find corporate tax incentives associated with employee stock sales mitigate insiders’ likeliness to hold.

Keywords: stock options, executive compensation, taxes

JEL Classification: H24, H25, J33

Suggested Citation

Huston, George Ryan and Smith, Thomas Joseph, Do Taxes Matter: Evidence of Individual and Corporate Tax Incentives on the Choice to Hold Shares Acquired from Exercise of Employee Stock Options (July 21, 2009). Available at SSRN: https://ssrn.com/abstract=1436967 or http://dx.doi.org/10.2139/ssrn.1436967

George Ryan Huston (Contact Author)

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

Thomas Joseph Smith

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

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