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
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
Are CEOS Really Paid Like Bureaucrats?
By Brian J. Hall and Jeffrey B. Liebman
-
The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
Good Timing: CEO Stock Option Awards and Company News Announcements
-
The Use of Equity Grants to Manage Optimal Equity Incentive Levels
By John E. Core and Wayne R. Guay
-
The Other Side of the Tradeoff: the Impact of Risk on Executive Compensation
-
Stock Options for Undiversified Executives
By Brian J. Hall and Kevin J. Murphy