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Firm Performance, Capital Structure, and the Tax Benefits of Employee Stock Options

Published online by Cambridge University Press:  06 April 2009

Kathleen M. Kahle  and
Kuldeep Shastri
Kathleen M. Kahle
Affiliation:
kkahle@eller.arizona.edu, University of Arizona, Eller College of Management, 315 McClelland Hall, Tucson AZ 85721
Kuldeep Shastri
Affiliation:
kuldeep@katz.pitt.edu, University of Pittsburgh, Katz Graduate School of Business, 368B Mervis Hall, Pittsburgh, PA 15260.
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Abstract

This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 1 , March 2005 , pp. 135 - 160
Copyright
Copyright © School of Business Administration, University of Washington 2005

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