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

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  • Kahle, Kathleen M.
  • Shastri, Kuldeep

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.

Suggested Citation

  • Kahle, Kathleen M. & Shastri, Kuldeep, 2005. "Firm Performance, Capital Structure, and the Tax Benefits of Employee Stock Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(1), pages 135-160, March.
    • Handle: RePEc:cup:jfinqa:v:40:y:2005:i:01:p:135-160_00
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    Cited by:

    1. Doina Prodan Palade, 2016. "Firm Characteristics and their Effects on Foreign Direct Investment Evidence from Romania, Republic of Moldova and Republic of Turkey," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(6), pages 119-133, DECEMBER.
    2. Hammoudeh, Shawkat & Tripathi, Nitya Nand & Raj, Asha Binu & Tiwari, Aviral Kumar, 2024. "Oil price volatility and changes in corporate debt: An empirical study in the Indian landscape," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    3. Keshab Bhattarai & Vipin Negi, 2020. "FDI and Economic Performance of Firms in India," Studies in Microeconomics, , vol. 8(1), pages 44-74, June.
    4. Chen, Tsung-Kang & Liao, Hsien-Hsing & Chi, Cheng-Ming, 2014. "The economic consequences of regulatory changes in employee stock options on corporate bond holders: SFAS No.123R and structural credit model perspectives," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 381-394.
    5. John R. Graham & Mark H. Lang & Douglas A. Shackelford, 2002. "Employee Stock Options, Corporate Taxes and Debt Policy," NBER Working Papers 9289, National Bureau of Economic Research, Inc.
    6. Marcelo Rabelo Henrique & Sandro Braz Silva & Ant?nio Saporito & S¨¦rgio Roberto da Silva, 2020. "Determinants of the Capital Structure of Companies Listed on the Stock Exchanges of Argentina, Brazil and Chile: An Empirical Analysis of the Period from 2007 to 2016," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(6), pages 1-18, June.
    7. Hamid Mehran & Joshua V. Rosenberg, 2007. "The effect of employee stock options on bank investment choice, borrowing, and capital," Staff Reports 305, Federal Reserve Bank of New York.
    8. Eberhart, Allan C., 2005. "Employee stock options as warrants," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2409-2433, October.
    9. Devos, Erik & Rahman, Shofiqur, 2023. "Does labor unemployment insurance affect corporate tax aggressiveness?," International Review of Financial Analysis, Elsevier, vol. 90(C).

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