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Cancellation of Executive Stock Options: Tax and Accounting Income Considerations

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  • Amin Mawani

Abstract

Canadian firms face a trade†off between reporting higher accounting income and paying lower taxes that arises from their ability to cancel in†the†money executive stock options and making a substitute cash payment to the executive instead of issuing shares. Firms' trade†off hypotheses are operationalized in a multilateral framework and empirically tested using insider†trading data. The multilateral approach is designed to control for the incentive effects of alternative compensation schemes and to determine the cancellation payment that keeps the executive indifferent between receiving cash or shares. The results show that firms consider both taxes and financial reporting costs in determining their option cancellation behavior.

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  • Amin Mawani, 2003. "Cancellation of Executive Stock Options: Tax and Accounting Income Considerations," Contemporary Accounting Research, John Wiley & Sons, vol. 20(3), pages 495-517, September.
    • Handle: RePEc:wly:coacre:v:20:y:2003:i:3:p:495-517
    DOI: 10.1506/VNVL-GVQ9-GYYQ-Y3NK
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    Cited by:

    1. Compton, Ryan & Nicholls, Christopher C. & Sandler, Daniel & Tedds, Lindsay, 2011. "Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison," MPRA Paper 39789, University Library of Munich, Germany.
    2. Kou, Zonglai & Tang, Yue & Wu, Hong & Zhou, Min, 2023. "Ownership, volatility, and equity incentives: Theory and evidence from listed companies in China," Economic Modelling, Elsevier, vol. 128(C).
    3. Amin Mawani, 2007. "Simulating Firm-Specific Corporate Marginal Tax Rates in a Canadian Context," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 77-96, March-Jun.
    4. Liqiang Chen & Hong Fan & Xiaofei Song, 2023. "Impact of professor‐directors on Chinese firms' environmental performance," International Review of Finance, International Review of Finance Ltd., vol. 23(4), pages 696-720, December.

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