Employee stock options corporate tax and debt policy

Opsi Saham Karyawan, Pajak Perusahaan dan Kebijakan Hutang John R. Graham. Mark H. Lang, Douglas A. Shackelford NBER Working Paper No. 9289 Diterbitkan pada bulan Oktober 2002 Program NBER: PE Kami menemukan bahwa deduksi opsi saham karyawan menghasilkan penghematan pajak agregat yang besar untuk perusahaan Nasdaq 100 dan SP 100 dan juga mempengaruhi perusahaan Tarif pajak marjinal Bagi perusahaan Nasdaq, tingkat pajak marjinal rata-rata adalah 31 persen ketika pengurangan opsi diabaikan namun turun menjadi 5 persen ketika seseorang memperhitungkan deduksi tersebut. Namun, untuk perusahaan SP, pemotongan opsi tidak mempengaruhi tingkat pajak marjinal secara besar-besaran. Dengan semangat DeAngelo dan Masulis (1980), deduksi pilihan adalah perisai pajak nondebt penting yang dapat mempengaruhi kebijakan perusahaan. Kami menemukan bukti yang konsisten dengan pengurangan opsi yang menggantikan pengurangan bunga dalam keputusan struktur modal perusahaan. Bukti ini menjelaskan mengapa sebagian perusahaan tampak kurang berpenduduk. Opsi Saham Perusahaan, Kebijakan Pajak dan Utang Perusahaan Ditulis oleh: John R. Graham, Mark H. Lang dan Douglas A. Shackelford Kami menemukan bahwa deduksi opsi saham karyawan menghasilkan agregat besar Penghematan pajak untuk perusahaan Nasdaq 100 dan SampP 100 dan juga mempengaruhi tingkat pajak marjinal perusahaan. Bagi perusahaan Nasdaq, termasuk efek opsi mengurangi perkiraan tarif marjinal median rata-rata dari 31 persen menjadi 5 persen. Bagi perusahaan SampP, sebaliknya, pemotongan opsi tidak mempengaruhi tingkat pajak marjinal secara besar-besaran. Bukti kami menunjukkan bahwa pengurangan opsi adalah perisai pajak nondebt yang penting dan deduksi opsi itu menggantikan pengurangan bunga dalam keputusan struktur modal perusahaan, menjelaskan mengapa sebagian perusahaan menggunakan begitu sedikit hutang. Makalah ini membahas implikasi pajak perusahaan terhadap kompensasi karyawan dengan opsi saham yang tidak memenuhi syarat. Korporasi mengurangi perbedaan antara harga pasar saat ini dan harga mogok ketika seorang karyawan menggunakan opsi saham yang tidak memenuhi syarat. Untuk perusahaan pilihan intensif dengan kenaikan harga saham, deduksi ini bisa sangat besar. Kami fokus pada dampak opsi pada tingkat pajak marjinal tahun 2000 (MTR) untuk perusahaan Nasdaq 100 dan SampP 100 dan implikasinya terhadap kebijakan hutang.1 Memahami implikasi perpajakan opsi semakin penting karena proporsi kompensasi yang dibayarkan pada opsi saham telah Melambung dalam beberapa tahun terakhir. Sebuah perspektif mengenai besaran kompensasi opsi dan kenaikannya dari waktu ke waktu dapat diperoleh dari makalah seperti Desai (2002) yang melaporkan bahwa lima perwira teratas dari 150 perusahaan AS menerima opsi dengan nilai hibah melebihi 16 miliar pada tahun 2000, yang dia memperkirakan Adalah peningkatan sepuluh kali lipat selama dekade ini. Dia memperkirakan bahwa hasil dari opsi latihan rata-rata 29 persen arus kas operasi pada tahun 2000, naik dari 10 persen di tahun 1996. Selain itu, pelaksanaan opsi saham ini telah menciptakan potongan pajak penghasilan perusahaan yang besar. Sullivan (2002) memperkirakan bahwa total penghematan pajak perusahaan dari pengurangan opsi saham melonjak dari 12 miliar di tahun 1997 menjadi 56 miliar pada tahun 20002 Cipriano, Collins dan Hribar (2001) melaporkan bahwa penghematan pajak dari opsi saham empl oyee untuk Samper 100 dan Nasdaq 100 rata-rata 32 persen arus kas operasi pada tahun 2000, naik dari 8 persen pada tahun 1997. Sullivan (2002) menambahkan bahwa pengurangan pajak opsi pada tahun 2000 melampaui laba bersih untuk delapan dari 40 perusahaan terbesar AS (sebagaimana ditentukan oleh Kapitalisasi pasar): Microsoft, AOL, Cisco Systems, Amgen, Dell Computer, Sun Microsystems, Qualcomm, dan Lucent. Selanjutnya, opsi kompensasi telah menyebar melampaui saham teknologi. Perusahaan yang beragam seperti General Electric, Pfizer, Citigroup, dan IBM mengurangi lebih dari 1 miliar opsi kompensasi saham pada tahun 2000. Analisis kami menegaskan bahwa pengurangan opsi saham karyawan secara substansial mengurangi pembayaran pajak perusahaan. Kami memperkirakan bahwa, pada tahun 2000, opsi saham mengurangi pendapatan kena pajak perusahaan sekitar 100 miliar untuk sampel SampP 100 dan Nasdaq 100 perusahaan kami. Untuk perusahaan SampP 100, deduksi opsi saham agregat sama dengan sekitar 10 persen dari pendapatan sebelum pajak agregat. Bagi Nasdaq 100 perusahaan (yang lebih banyak pilihan-intensif), deduksi agregat melebihi pendapatan sebelum pajak agregat. Studi ini, bagaimanapun, berfokus terutama pada pengaruh opsi saham karyawan terhadap MTR dan dampaknya terhadap struktur modal. MTR merupakan masukan penting bagi banyak keputusan ekonomi. Secara khusus, jika opsi saham karyawan cukup besar untuk mempengaruhi MTR, mereka dapat mengurangi nilai pemotongan bunga dan mengubah insentif untuk menerbitkan hutang. Kami menemukan bahwa pengurangan opsi saham mengurangi MTR secara substansial. Bagi perusahaan Nasdaq, deduksi tersebut terdiri dari sebagian besar pendapatan pra-pilihan sehingga MTR median jatuh dari 31 persen ketika kita mengabaikan pengurangan opsi menjadi 5 persen ketika pengurangan opsi disertakan dalam penghitungan tarif pajak. Bagi perusahaan SampP, MTR median sedikit terpengaruh oleh pengurangan opsi. Seperti dijelaskan lebih rinci pada Bagian I, kami mengisolasi pengaruh tiga kelas pilihan pada MTR: yang telah dilaksanakan, yang diberikan namun belum dilaksanakan, dan yang belum diberikan. Setiap kelas pilihan berkontribusi terhadap pengurangan MTR secara keseluruhan. Kami kemudian menguji apakah dampak opsi saham karyawan terhadap MTRs mempengaruhi kebijakan hutang. DeAngelo dan Masulis (1980) berpendapat bahwa perusahaan mengganti antara perisai hutang dan nondebt (seperti potongan opsi) saat menentukan struktur modal optimal mereka. Penyelidikan sebelumnya atas efek substitusi ini tidak meyakinkan (lihat Graham (2003) untuk tinjauan ulang). Beberapa makalah menyimpulkan bahwa perusahaan high-MTR tampaknya tidak memiliki hutang dalam struktur permodalan mereka. Hanlon dan Shevlin (2002), bagaimanapun, menunjukkan bahwa studi sebelumnya mungkin gagal mendeteksi hubungan MTR-hutang yang diharapkan karena mereka mengabaikan pengurangan pajak dari opsi opsi saham. Dalam sampel kami, kami menemukan bahwa rasio hutang dan MTR tidak secara signifikan berpasangan berkorelasi saat kita mengabaikan pengurangan opsi dalam pembangunan MTR. Sebaliknya, setelah menyesuaikan deduksi opsi yang diharapkan, hubungan antara hutang dan pajak positif dan signifikan. Hasil ini menunjukkan bahwa akuntansi untuk pengurangan pajak yang terkait dengan opsi saham memberikan kekuatan inkremental yang penting untuk menjelaskan kebijakan hutang, yang konsisten dengan anjak piutang dalam efek pajak opsi ketika mereka memilih struktur modal. Selanjutnya, ketika kami mengidentifikasi perusahaan yang nampaknya kurang berpendidikan saat pengurangan opsi diabaikan, kami mendapati bahwa perusahaan-perusahaan ini adalah perusahaan yang menggunakan sebagian besar pilihan. Secara keseluruhan, analisis kami konsisten dengan perusahaan yang melakukan trading dari hutang dan perisai pajak nondebt saat membuat keputusan struktur modal, dengan cara yang disarankan oleh DeAngelo dan Masulis (1980). Hasil kami juga dapat memberikan jawaban parsial terhadap teka-teki mengapa beberapa perusahaan saat ini menggunakan begitu sedikit hutang (Graham (2000)) begitu potongan opsi dipertimbangkan, MTR untuk perusahaan-perusahaan ini mencerminkan insentif pajak kecil untuk menggunakan hutang, sehingga hutang mereka rendah Rasio mungkin tepat. Makalah kami terkait dengan beberapa cabang penelitian akademis. Bagian kedua dari makalah kami paling mirip dengan Kahle dan Shastri (2002), yang menyelidiki apakah perusahaan dengan potongan opsi besar menggunakan lebih sedikit hutang. Namun, Kahle dan Shastri tidak mempertimbangkan beberapa isu yang kami hadapi. Pertama, mereka tidak menghitung MTRs, atau efek pilihan pada MTRs. Kelalaian ini merupakan kekurangan karena pengurangan opsi seharusnya hanya mempengaruhi keputusan struktur modal sejauh hal itu mempengaruhi MTR. Kedua, seperti yang dibahas lebih rinci nanti, mereka mengukur pengurangan opsi dengan jumlah tunjangan pajak yang terdapat dalam laporan keuangan, daripada menggunakan informasi yang lebih akurat yang terdapat dalam catatan saham opsi saham (Hanlon dan Shevlin (2002)). Ketiga, Kahle dan Shastri tidak memperhitungkan dampak pilihan yang sudah diberikan tapi belum pernah dilakukan, atau pilihan yang belum diberikan. Akhirnya, Kahle dan Shastri tidak membahas ketidakpastian waktu pelaksanaan opsi, atau secara umum bagaimana potongan opsi berinteraksi dengan aspek dinamis dari kode pajak pendapatan federal. Kami memberikan rincian di Bagian I dan II yang menjelaskan bagaimana kami memperhitungkan pengaruh-pengaruh yang kadang-kadang tidak kentara ini. Selain penelitian tarif pajak dan struktur modal yang efektif, makalah ini terkait dengan dua cabang penelitian lainnya. Pertama, serangkaian makalah menyelidiki apakah insentif pajak berperan dalam bentuk kompensasi yang dipilih perusahaan untuk digunakan. Penelitian awal di bidang ini tidak meyakinkan (misalnya Hall dan Liebman (2000)) namun, penelitian terbaru oleh Core dan Guay (2001) menemukan bahwa perusahaan dengan tarif pajak tinggi mengeluarkan lebih sedikit opsi saham kepada pegawai non-eksekutif, mungkin karena perusahaan lebih suka Gunakan bentuk kompensasi tradisional yang mengarah pada pengurangan langsung. Makalah kami tidak menyelidiki apakah pajak mempengaruhi pilihan antara berbagai bentuk kompensasi, tetapi menyarankan agar perusahaan mempertimbangkan dampak pajak kompensasi saat menentukan struktur modal perusahaan. Kedua, makalah kami terkait dengan literatur yang menyelidiki bagaimana manajer pajak mengoptimalkan kebijakan pajak perusahaan (misalnya Scholes dkk (2002)). Kami berkontribusi pada literatur ini dengan memberikan bukti yang konsisten dengan manajer pajak mengingat interaksi berbagai kebijakan perusahaan saat memilih posisi pajak.3 Pada bagian selanjutnya, kami membahas masalah konseptual utama yang muncul dalam menilai pengaruh opsi saham terhadap MTR dan Pendekatan untuk mengatasinya. Bagian II membahas pendekatan empiris kami secara rinci dan menggambarkan data. Bagian III menganalisis pengaruh pengurangan opsi pada MTR korporat. Bagian IV membahas interaksi antara opsi pemotongan dan kebijakan hutang perusahaan. Bagian V menyajikan penutup penutup. I. Masalah Pajak Terkait Pengurangan Perusahaan dari Opsi Saham Karyawan Prosedur simulasi yang kami gunakan untuk memperkirakan MTR tahun 2000 memasukkan fitur dinamis dari kode pajak termasuk carryback pajak dan carry and forward (Shevlin (1990) dan Graham (1996)). Prosedur tersebut menentukan MTR berdasarkan efek pajak tambahan yang terkait dengan tambahan dolar pendapatan yang diperoleh pada tahun 2000. Efek tambahan dari tambahan dolar pendapatan pada tahun 2000 dapat direalisasikan di manapun antara tahun 1998 (karena periode pengembalian rugi pajak dua tahun ) Dan 2020 (karena akumulasi rugi fiskal 20 tahun), atau tidak sama sekali (jika kerugian cukup untuk mengimbangi semua keuntungan lancar dan masa depan). Untuk memodelkan efek carryforward, pertama-tama kita membuat perkiraan awal masa depan dengan meramalkan pendapatan kena pajak di masa depan (dibahas pada Bagian II. B), perilaku pemberian hibah dan latihan di masa depan (Bagian II. C), dan harga saham masa depan (Bagian II. D ). Dimulai dengan perkiraan awal, kami memperkirakan konsekuensi pajak nilai sekarang yang terkait dengan satu tambahan dolar pendapatan yang diperoleh pada tahun 2000. Jika, karena carryforwards atau carryback, konsekuensi pajak terjadi pada tahun 2001 atau yang lebih baru, kami mendiskontokan efek tambahan kembali ke tahun - 2000 dolar. Pada Bagian II. E, kami mengeksplorasi hal-hal yang berkaitan dengan potongan pajak kewajiban ketika perusahaan memiliki opsi saham dikurangi. Untuk menangkap ketidakpastian tentang masa depan, kami menghasilkan 50 perkiraan awal acak masa depan, yang masing-masing menghasilkan perkiraan MTR. MTR yang diharapkan adalah tarif pajak rata-rata di antara 50 perkiraan ini. Dengan tidak adanya opsi saham, memperkirakan MTR relatif mudah. Seseorang dapat menggunakan mean tingkat pertumbuhan dan varians tersirat dari perkiraan waktu historis dari penghasilan kena pajak (diperkirakan dari pendapatan sebelum pajak yang disesuaikan dengan pajak tangguhan seperti yang dijelaskan lebih rinci pada bagian berikutnya) sebagai parameter benih untuk menghasilkan 50 prakiraan baseline acak Masa depan sampai tahun 2020. Namun, adanya opsi memperkenalkan beberapa isu penting ke dalam prosedur simulasi standar. Kami membahas masalah ini selama sisa bagian ini. Pertama, seseorang tidak dapat lagi menyesuaikan pendapatan sebelum pajak dengan pajak tangguhan untuk memperkirakan penghasilan kena pajak karena, tidak seperti bentuk kompensasi lainnya, opsi saham biasanya tidak tercermin dalam pendapatan sebelum pajak atau pajak tangguhan. Dalam hal pendapatan sebelum pajak, opsi umumnya tidak dianggap sebagai biaya laporan laba rugi, dan perusahaan yang memilih untuk tidak membebani opsi saham juga tidak mengurangi beban pajak atas laporan laba rugi untuk mencerminkan dampak pemotongan opsi.4 Selanjutnya, tidak seperti banyak perbedaan booktax , Pengaruh opsi tidak tertangkap dalam pajak tangguhan karena perbedaan antara pajak dan pendapatan buku tidak pernah berbalik. Akibatnya, perusahaan dapat secara konsisten melaporkan beban pajak yang tinggi (atas laporan keuangan) dan tidak pernah membayar pajak (untuk pengembalian pajak). Penelitian sebelumnya biasanya menggunakan data laporan laba rugi untuk menyimpulkan penghasilan kena pajak, dan dengan demikian mengabaikan pengurangan kompensasi pilihan untuk sebagian besar perusahaan (karena kebanyakan perusahaan tidak memiliki pilihan biaya). Pengecualian adalah Kahle dan Shastri (2002), yang membuat penyesuaian untuk opsi saham menggunakan manfaat pajak yang dilaporkan dari jumlah opsi saham untuk menyesuaikan pendapatan sebelum pajak.5Hanlon dan Shevlin (2002) menekankan bahwa dengan menggunakan pendekatan ini bermasalah karena beberapa alasan. Pertama, banyak perusahaan tidak secara terpisah melaporkan manfaat pajak dari opsi saham dalam laporan keuangannya. Bahkan untuk Nasdaq 100, yang opsi opsi sahamnya cenderung besar, Hanlon dan Shevlin mencatat bahwa hanya 63 perusahaan yang melaporkan manfaat pajak dari opsi dalam laporan keuangan tahun 1999 mereka. Selanjutnya, sambil menyesuaikan laba sebelum pajak untuk manfaat pajak opsi relatif mudah jika penghasilan kena pajak positif, kasus dengan rugi fiskal lebih kompleks karena pengaruh rugi usaha bersih dan kenaikan nilai pajak. Kami menghindari masalah ini dengan mengikuti saran Hanlon dan Shevlins dan mengumpulkan data deduksi opsi kami dari informasi terperinci tentang hibah dan latihan yang ditemukan dalam catatan kaki keuangan. Informasi ini dilaporkan secara konsisten di seluruh perusahaan terlepas dari status pajak. Isu unik kedua dengan opsi saham adalah bahwa MTR periode saat ini dapat dipengaruhi oleh beberapa kelas pemotongan opsi: Mereka berasal dari opsi yang telah dieksekusi (karena hal tersebut mempengaruhi tingkat penghasilan kena pajak saat ini dan kemungkinan kerugian pajak yang harus dikeluarkan), dan juga Yang dikaitkan dengan overhang opsi yang sudah diberikan namun belum dieksekusi dan opsi yang belum diberikan (karena opsi kelas ini dapat menciptakan kerugian di masa depan yang mempengaruhi MTR periode berjalan melalui fitur carryforward and carryback dari pajak kode). Semua penelitian yang kami sadari hanya mempertimbangkan salah satu dari jenis opsi ini: opsi yang sudah dieksekusi. Keterbatasan ini dapat diterima untuk penelitian yang meneliti beban pajak yang efektif seperti Desai (2002), Hanlon dan Shevlin (2002), dan Sullivan (2002). Namun, penting untuk mempertimbangkan ketiga kelas pilihan saat mempelajari keputusan ekonomi berdasarkan insentif pajak marjinal. Pilihan yang beredar namun belum dilakukan, misalnya, membuat deduksi overhang dalam arti bahwa perusahaan dapat menemukan dirinya dalam posisi di mana terdapat banyak opsi dalam-dalam-uang yang beredar yang kemungkinan akan dilakukan di masa depan, mengurangi pendapatan kena pajak dan (Melalui fitur carryback kode pajak) MTR tahun berjalan. Akibatnya, dua perusahaan yang saat ini memberikan kompensasi kompensasi serupa mungkin dapat menemukan diri mereka dalam posisi MTR yang sangat berbeda tergantung pada perilaku harga saham sebelumnya dan jumlah opsi yang tetap tidak dieksekusi. Kami menggunakan informasi catatan kaki mengenai opsi pilihan dan opsi pemberian opsi sebelumnya untuk memperkirakan kemungkinan dampak opsi yang ada dan opsi hibah masa depan pada MTR saat ini. Isu konseptual ketiga yang unik untuk penelitian opsi saham adalah ketidakpastian jika dan bila opsi yang belum dieksekusi akan menghasilkan potongan pajak perusahaan. Karena harga saham tidak stabil dan pilihan memiliki umur yang panjang (paling sering sepuluh tahun), opsi saat ini yang beredar dan hibah opsi di masa depan dapat menghasilkan deduksi besar di masa depan atau tidak ada deduksi sama sekali, tergantung pada jalur harga saham. Sifat stokastik dari deduksi opsi saham dapat secara substansial mempersulit perhitungan estimasi MTR dan akibatnya keputusan perusahaan di mana pajak relevan. Jalur harga saham dan keputusan latihan karyawan sulit diprediksi, dan untuk perencanaan pajak dan keuangan yang efisien, seorang manajer perlu mempertimbangkan probabilitas dan jumlah deduksi pilihan di masa depan. Kami secara eksplisit menerapkan pendekatan simulasi untuk mempertimbangkan pengurangan opsi saham dengan menggunakan informasi mengenai opsi saham, volatilitas return saham, dividen, dan hasil yang diharapkan untuk memodifikasi teknologi simulasi Graham (1996). Kami menggabungkan deduksi yang diharapkan dengan penghasilan kena pajak masa depan yang disimulasikan untuk sampai pada estimasi MTRs probabilitas tertimbang. Analisisnya sangat mirip dengan pendekatan yang kita bayangkan manajer perusahaan akan berusaha membuat keputusan berdasarkan MTR yang diharapkan. Sepengetahuan kami, penelitian kami adalah studi pertama yang mengambil perspektif ex ante secara eksplisit memasukkan informasi opsi pra-latihan ke estimasi MTR. II. Pendekatan Empiris Kami mempelajari perusahaan-perusahaan yang berada di Standard and Poors 100 dan Nasdaq 100 pada tanggal 17 Juli 2001 (pada hari kami memulai pengumpulan data). Mereka terdiri dari sebagian besar ekonomi dan membayar pajak yang besar.6Analisis perusahaan SampP 100 memberikan wawasan tentang perusahaan industri tradisional dan stabil. Nasdaq 100 perusahaan adalah yang paling menguntungkan dan stabil di kalangan perusahaan teknologi tinggi pilihan intensif. Tujuh perusahaan berada di kedua Nasdaq dan SampP, jadi sampel awal mencakup 193 perusahaan. Sepanjang analisis MTR kami, kami memasukkan ketujuh perusahaan ini di sub-sampel SampP tapi tidak memasukkannya dari subsider Nasdaq untuk menghindari penghitungan ganda. Kami tidak dapat menemukan data untuk tiga perusahaan, yang mengurangi sampel menjadi 190 perusahaan.7 Kami membatasi sampel ke 190 perusahaan ini karena (i) mengumpulkan data opsi saham dalam catatan keuangan catatan biaya mahal, dan (ii) simulasi kami Metode ini cenderung menghasilkan hasil yang dapat diandalkan untuk perusahaan kecil yang tidak stabil. Kami membayangkan sebuah skenario di mana seorang manajer menilai perusahaannya MTR pada akhir tahun fiskal. Poin referensi kami adalah tahun terakhir dimana data tersedia pada awal proyek ini, yaitu akhir tahun anggaran 2000 seperti yang didefinisikan oleh Compustat (akhir tahun dari bulan Juni 2000 sampai Mei 2001) untuk sebagian besar perusahaan sampel. 8 Harga saham pada akhir tahun 2000 secara substansial berada di bawah tingkat tertinggi pasar, meskipun masih di atas tingkat pasar saat ini, yang menimbulkan pertanyaan apakah temuan dalam penelitian ini bersifat periodik. Karena periode penyelidikan mengikuti pasar bullish yang panjang, para manajer mungkin tidak akan membayangkan besarnya pemotongan opsi saham saat mereka memberikan opsi tahun-tahun sebelumnya. Meskipun demikian, karakterisasi kita mewakili situasi yang dihadapi perusahaan pada akhir tahun 2000, dengan manajer yang menghadapi MTR serupa dengan yang diperkirakan dalam penelitian ini.9 Lebih umum lagi, pendekatan yang kita kembangkan dalam penelitian ini semestinya bermanfaat setiap tahun untuk memasukkan Pengurangan opsi saham dalam perhitungan MTR, apakah potongan opsi itu besar atau kecil pada tahun tertentu. B. Memperkirakan Pendapatan Historis dan Masa Depan (Mengabaikan Pengurangan Opsi) Kami menerapkan variasi dari algoritma simulasi yang digunakan di Shevlin (1990) dan Graham (1996), yang memerlukan perkiraan pendapatan masa depan untuk menghitung MTR tahun berjalan. Prosedur kami mengasumsikan bahwa pendapatan tahun depan sama dengan pendapatan tahun ini ditambah inovasi. Inovasi diambil dari distribusi normal dengan pertumbuhan dan volatilitas yang dihitung dari data historis spesifik perusahaan. Karena pilihan tidak menciptakan tagihan untuk laba akuntansi, ukuran laba sebelum pajak berbasis Compustat kami, yang disesuaikan dengan pajak tangguhan, tidak mencakup efek deduksi opsi saham.10 Dengan perpanjangan, perkiraan dasar pendapatan masa depan kami tidak termasuk dampaknya. Dari deduksi pilihan Selain itu, karena data kami berasal dari laporan keuangan, ukuran penghasilan kena pajak kami menghadapi keterbatasan yang biasa terjadi ketika jumlah buku digunakan untuk perkiraan pembayaran pajak, termasuk perbedaan dalam pajak buku dan konsolidasi keuntungan asing.11 Kami menggunakan data Compustat dari yang terakhir 20 tahun untuk menghitung pertumbuhan dan volatilitas spesifik perusahaan. Beberapa perusahaan memiliki informasi pendapatan historis yang ekstrem yang tampaknya tidak masuk akal ke depan. Oleh karena itu, kami mengikat setiap perusahaan pertumbuhan pendapatan dan volatilitas untuk jatuh di masing-masing 25 dan 75thpercentiles di antara semua perusahaan dalam kode SIC 2 digit yang sama.12 Dengan menggunakan estimasi tingkat pertumbuhan dan volatilitas ini, kami memperkirakan pendapatan kena pajak pra-pilihan untuk 20 tahun ke depan. C. Termasuk Latihan Opsi Bersejarah dan Masa Depan Sejak tahun 1996, SFAS 123 mewajibkan perusahaan untuk memasukkan catatan keuangan mereka, antara lain, (a) deskripsi persyaratan opsi, (b) jumlah opsi, harga strike rata-rata tertimbang, dan Sisa masa kontrak untuk opsi yang beredar pada akhir periode, (c) tiga tahun masa kerja, riwayat hibah dan pembatalan (jumlah saham dan harga rata-rata tertimbang), dan (d) nilai opsi Black-Scholes yang diberikan selama periode tersebut , Termasuk asumsi mendasar untuk imbal hasil dividen, tingkat bebas risiko, volatilitas return tahunan, dan perkiraan sebelum berolahraga. 13 Fir m memiliki kelambanan yang relatif kecil dalam alat bantu Black-Scholes mereka, dan format catatan kaki umumnya konsisten di seluruh perusahaan. Bagi perusahaan-perusahaan dengan pengungkapan yang tidak biasa, hasil kami kuat untuk dikecualikan mereka.14 Untuk tujuan ilustrasi, lampiran tersebut menyertakan catatan opsi saham Microsoft untuk tahun yang berakhir pada tanggal 30 Juni 2000. Hall dan Leibman (2000) menemukan bahwa 95 persen dari seluruh opsi saham adalah Tidak memenuhi syarat, jadi kami membuat asumsi yang menyederhanakan bahwa semua opsi yang dilaporkan dalam catatan kaki tidak memenuhi syarat. Catatan kaki berisi informasi latihan bersejarah untuk dua tahun sebelumnya dan tahun fiskal berjalan (1998, 1999, dan 2000 untuk sebagian besar perusahaan kami). Untuk masing-masing perusahaan, kami menghitung pengurangan opsi karena jumlah opsi yang dilakukan pada tahun tertentu menyimak perbedaan antara harga strike rata-rata untuk opsi tersebut dan harga saham pada saat exercise. Kami mengukur harga saham pada saat latihan untuk tahun tertentu dengan menggunakan harga saham rata-rata untuk opsi yang diberikan pada tahun yang sama.15 Memasukkan potongan opsi bersejarah ke dalam analisis kami sangat mudah: kami mengurangi pengurangan pilihan karyawan historis dari angka pendapatan historis yang diperoleh di Bagian sebelumnya Perhatikan bahwa pengurangan opsi historis dapat mempengaruhi MTR pada tahun 2000 dengan mengurangi penghasilan kena pajak di tahun 2000 dan juga dengan menciptakan kerugian pajak pada tahun 1998 atau 1999 yang dibawa ke depan pada tahun 2000. Kami bereksperimen dengan mengumpulkan data pilihan historis untuk tahun 1995, 1996, dan 1997 Untuk sampel acak dari delapan perusahaan untuk menyelidiki apakah kerugian pada tahun-tahun ini berlanjut sampai tahun 2000 cukup untuk mempengaruhi MTR pada tahun 2000. Namun, biaya pengumpulan-tangan data sangat besar dan manfaatnya kecil (data ekstra ini tidak mempengaruhi hasil kami) , Jadi kami tidak mengejar pengumpulan data opsi pra-1998 untuk perusahaan lain. Catatan kaki juga berisi informasi tentang pilihan yang sudah diberikan, namun belum dilakukan. Untuk menggabungkan deduksi masa depan ini ke dalam analisis kami, kami membuat asumsi tentang perilaku latihan pilihan. Huddart dan Lang (1996) dan Core dan Guay (2001) melaporkan bahwa pemilihan awal opsi saham karyawan umum dilakukan, dengan sebagian besar latihan terjadi sekitar separuh pilihan hidup, dan latihan tersebut cenderung menyebar dengan lancar dari waktu ke waktu. Dengan demikian, kami menggunakan opsi harapan yang diharapkan seperti perkiraan kami kapan latihan rata-rata akan terjadi dan menganggap olahraga menyebar dengan lancar selama periode yang dimulai dua tahun sebelum tahun itu dan berakhir dua tahun setelah tahun itu.16 Beberapa jalur harga saham menyiratkan bahwa latihan pilihan Tidak optimal karena harga pasar mendekati atau di bawah harga strike (turunan harga saham di masa depan dijelaskan pada bagian selanjutnya). Oleh karena itu, kita mengikuti konvensi di Huddart dan Lang (1996) dan menganggap tidak ada latihan selama bertahun-tahun di mana pilihan ada dalam uang sebesar 15 persen atau kurang (kecuali jika opsi tersebut pada saat kadaluarsa, dalam hal ini kita menganggap semua uang dalam-uang Opsi dieksekusi). Dalam kasus di mana opsi di luar uang atau hampir tidak ada uang, kami menunda latihan sampai tahun pertama di mana mereka berada pada posisi paling sedikit 15 persen (atau sampai kadaluarsa). 17 Pilihan masa depan deduksi dapat mempengaruhi MTR periode saat ini dalam dua cara. Pertama, jika mereka dieksekusi dalam dua tahun ke depan dan cukup besar untuk menghasilkan kerugian pajak, kerugian pajak dapat dibawa kembali untuk mengimbangi pajak yang dibayarkan pada tahun 2000. Perlakuan carryback ini dapat menghasilkan pengembalian dana pada tahun 2001 atau 2002 untuk pajak yang dibayarkan Pada tahun 2000, sehingga mengurangi MTR 2000. Kedua, bagi perusahaan yang tidak membayar pajak pada tahun 2000 namun membawa kerugian ke depan, deduksi opsi masa depan berpotensi menambah jumlah yang dibawa ke depan. Perawatan mutakhir ini dapat menunda tanggal di mana pajak akhirnya dibayarkan, sehingga mengurangi nilai MTR periode sekarang. Kelompok pilihan terakhir yang kami anggap adalah yang belum diberikan. Seperti yang baru saja dijelaskan, opsi ini berpotensi mempengaruhi 2000 MTR melalui carryback jika mengarah pada deduksi pada tahun 2001 atau 2002 (yang, mengingat asumsi kami tentang perilaku olahraga, hanya terjadi untuk perusahaan dengan masa pakai rata-rata empat tahun atau kurang) atau, untuk saat ini Perusahaan nontax, dengan menciptakan kerugian pajak yang besar yang akan dibawa ke depan. Kami berasumsi bahwa perusahaan memberikan opsi masa depan dalam jumlah yang sama dengan jumlah rata-rata yang diberikan (setelah pembatalan) selama tiga tahun terakhir, merupakan faktor pertumbuhan. 18 Faktor pertumbuhan didasarkan pada opsi pra-pilihan perusahaan yang diberikan kepada saya pertumbuhan (dibatasi antara persentil ke-25 dan ke-75 untuk tingkat pertumbuhan pendapatan perusahaan lain dalam kode SIC 2 digit yang sama) .19 Harga strike untuk perusahaan tertentu - Tahun opsi yang baru diberikan diasumsikan sebagai harga saham yang diperkirakan untuk tahun yang sama. Pada bagian selanjutnya kami menjelaskan bagaimana harga saham ditentukan. Untuk memasukkan deduksi pilihan di masa depan ke dalam analisis kami, kami mengurangi deduksi opsi di masa depan sepanjang jalur simulasi yang diberikan dari pendapatan pra-pilihan (seperti yang diperkirakan pada Bagian B). Ini menghasilkan perkiraan pendapatan kena pajak setelah memperhitungkan opsi. Pendekatan alternatif adalah mengurangi efek pilihan dari semua data historis (sampai 20 tahun data) dan kemudian langsung memperkirakan pendapatan pasca-opsi ke masa depan. Sayangnya, karena pengungkapan opsi saham baru diperlukan sejak tahun 1996, kami tidak dapat menyesuaikan perkiraan pendapatan kena pajak di tahun-tahun sebelumnya, jadi pendekatan alternatif ini tidak mungkin dilakukan. Akhirnya, selama penelitian ini kita mengabaikan repricing, yaitu mengurangi strike price dari pilihan yang sudah diberikan. Sejauh perusahaan berkomitmen pada kebijakan repricing selama pergerakan harga turun, pendekatan kami akan membawa kita untuk mengecilkan pilihan opsi di masa depan. D. Memperkirakan Harga Saham Masa Depan Kami memperkirakan harga saham di masa depan sehingga kami dapat memproyeksikan besarnya pengurangan opsi saham di masa depan. Kami memproyeksikan jalur harga saham masa depan yang terpisah yang terkait dengan masing-masing dari 50 simulasi pendapatan masa depan yang dijelaskan di Bagian I dan II. B. Prosedur ini memungkinkan nilai opsi saham bervariasi dengan harga saham (dan karena kami menghubungkan harga saham dengan pendapatan, bervariasi dengan simulasi pendapatan yang berbeda). Untuk memproyeksikan harga saham di masa depan, kami menghitung tingkat pengembalian yang diharapkan untuk masing-masing perusahaan, berdasarkan model pasar CAPM. Perhitungan total total ini memerlukan beta spesifik perusahaan (diambil dari CRSP), tingkat bebas risiko (dari masing-masing catatan opsi saham perusahaan), dan premi risiko ekuitas sebesar 3,0 persen (yang konsisten dengan perkiraan premi risiko terkini Dalam Fama dan French (2002) dan Graham dan Harvey (2002)) 20 Kami tertarik untuk memberikan apresiasi modal terhadap harga saham, jadi kami mengurangi dividen spesifik perusahaan dari masing-masing perusahaan. Harga saham cenderung bervariasi dengan pendapatan. Easton dan Harris (1991) menunjukkan bahwa perubahan dalam pendapatan tahunan dan tingkat pengembalian tahunan terkait secara positif (korelasi Pearson sekitar 20 persen). Oleh karena itu, untuk menggabungkan hubungan empiris positif antara tingkat pengembalian saham dan pendapatan, kami memodifikasi hasil yang diharapkan untuk menghubungkannya dengan proyeksi pendapatan yang diperoleh dari Bagian B. Kami berasumsi bahwa pendapatan yang tidak terduga mendadak disertai oleh pengembalian saham yang diharapkan secara proporsional. Misalnya, pertimbangkan sebuah kasus di mana pendapatan diperkirakan akan tumbuh pada 10 persen dan harga saham diperkirakan akan tumbuh sebesar 12 persen. Misalkan dalam simulasi yang diberikan kita sampai pada jalur dengan pendapatan tumbuh 15 persen di tahun pertama (tingkat pertumbuhan 50 persen lebih tinggi dari yang diperkirakan). Untuk menghubungkan kedua seri tersebut, kami menetapkan return saham yang diharapkan sebesar 18 persen pada jalur itu untuk tahun itu (50 persen lebih tinggi dari perkiraan). Penyesuaian ini mengubah return saham yang diharapkan dengan cara yang menghubungkan pendapatan dan pendapatan.21 Pemeriksaan kekokohan, bagaimanapun, menunjukkan bahwa tingkat korelasi yang diasumsikan tidak terlalu penting. Ketika kita mereplikasi studi dengan asumsi independensi antara pendapatan tahunan dan imbal hasil tahunan, kesimpulan secara kualitatif tidak berubah (tarif pajak rata-rata adalah 50 basis poin lebih tinggi daripada yang dilaporkan dalam kasus dasar di bawah ini). Selain itu, hasil kualitatif kami tidak berubah jika kita menganggap kenaikan harga saham yang diharapkan sebesar 12 persen per tahun untuk semua perusahaan.22 Dengan imbal hasil saham yang diharapkan, kami memproyeksikan harga saham di masa depan dengan menarik pengembalian dari distribusi lognormal. Untuk setiap tahun, rata-rata distribusi ini sama dengan perkiraan pengembalian, yang dihitung hanya sebagai penjelasan, dan variannya adalah yang dilaporkan dalam catatan opsi saham.23 Dalam pendekatan kami, kami menggunakan data historis untuk memperkirakan pertumbuhan pendapatan (seperti yang dijelaskan dalam Bagian B ) Dan CAPM yang dimodifikasi diharapkan kembali (seperti yang baru saja dijelaskan). Dalam cek ketahanan, kami menggunakan proyeksi Value Line untuk 131 perusahaan dalam sampel kami dimana Value Line memberikan perkiraan. Untuk pertumbuhan pendapatan, kami mengelompokkan perkiraan tingkat pertumbuhan rata-rata pertumbuhan Value Line empat tahun saat tersedia, atau menggunakan tingkat pertumbuhan pendapatan Value Line saat pertumbuhan penjualan tidak tersedia. Untuk imbal hasil saham, kami mengelompokkan return implisit rata-rata harga saham empat tahun ke depan yang tinggi dan target harga saham. Dengan menggunakan tingkat pendapatan alternatif dan tingkat pertumbuhan saham ini berarti MTR yang hanya 12 basis poin lebih tinggi daripada yang kami laporkan di bawah ini dan tidak ada perbedaan dalam keseluruhan hasil kualitatif. E. Mengurangi Pengurangan Opsi Saham di Masa Depan Pada bagian ini, kami membahas tingkat diskonto yang kami gunakan untuk menentukan konsekuensi pajak nilai sekarang dari pengurangan opsi saham untuk MTR. Ingat bahwa karena komponen carryback dan carryforward dari kode pajak, efek deduksi hari ini dapat dirasakan jauh ke masa depan. The issue is determining what rate should be used to discount these future tax consequences. Some previous research (e. g. Graham (1996, 2000)) uses the corporate bond yield as the discount rate to determine the present value of the tax effect of various deductions (e. g. debt interest) on MTRs and firm value. This approach implicitly assumes that the tax effects of these deductions have the same risk as debt, as assumed by Modigliani and Miller (1958) for interest deductions. It seems less reasonable to discount the effects of future option deductions using the debt rate. Options generate deductions on exercise, and option exercise is correlated with stock returns therefore, options lead to higher compensation costs, as well as tax benefits, when share prices are high.24In the remainder of this section we discuss conceptually how we think that tax liabilities in a stock option world should be discounted, and we link this conceptual framework with our empirical implementation of discounting tax liabilities within the simulation procedure. To keep the discussion focused on the discount rate, we start by making several simplifying assumptions. We assume that options are cash settled, or equivalently, that firms purchase shares on the open market to deliver to employees when they exercise their options. Shares are repurchased at a fair and efficient market price, using funds that would have otherwise been invested in zero-NPV projects, so there are no dilution concerns and no change in the number of shares outstanding. We also assume that there are no incentive effects from options (and therefore option incentive effects do not cause employees to produce more in some states, nor change the cash flows or correlation of pre-tax inco m e and the m arket return). 25 Finally, we assume that no-option cash flows are positively correlated with the market, so the firms no - option cash flow beta is positive, as is the beta on no-option taxable income. Given these assumptions, how should tax liabilities be discounted for a firm that uses options as part of their compensation package (Note that the only place that we use a discount rate is within the simulation procedure, to discount the incremental future tax liability stream associated with earning an extra dollar in 2000). If a firm pays a fixed wage W, after tax income (ignoring carrybacks and carryforwards) is where CF is cash flow (before the effects of wages or options) and C is the corporate income tax rate. The min appears because tax liabilities cannot be negative. When min(CF, W)W, this becomes simply (CF-W)(1-t). For convenience, assume that wage payments are uncorrelated with stock prices. With option cash settlement and assuming that options have a negligible strike price, after-tax income is Both covariance terms in the braces will generally be positive, so the sign of the overall correlation between tax liabilities and stock price depends on whether the first covariance is larger than the second. Because cash flows are generally substantially larger than option deductions, the overall correlation between tax liabilities and stock price will typically be positive but, if the second term in the braces is large enough in absolute magnitude, the overall correlation can be negative. If the second term is small, the correlation does not differ much from the correlation in the no options case. It is an empirical matter as to whether the overall correlation is positive or negative. Using data for the firms in our sample, we determine that the correlation between tax liabilities and stock price is positive on average for the levels of these two variables, and also for percentage changes for these two series. Therefore, our argument is that the beta is positive for tax liabilities and the appropriate rate to discount tax liabilities lies somewhere between the risk - free rate and the equity rate. We show below that the implications in our paper do not change for various discount rates in this range. In the base case for this paper, to determine the present value of incremental tax liabilities associated with earning an extra dollar in 2000 (i. e. to determine the year-2000 MTR), we discount using a firm-specificequity rate. This is conservative relative to using a smaller discount rate because it will reduce the effect of changes in future tax liabilities on current-period MTRs. Discounting with an equity rate is an approximationbecause it misses the fact that option deductions are zero below some exercise price, and hence do not contain pure equity risk. It is also an approximation because it does not explicitly account for the associationbetween earnings and stock prices inherent in our approach (see Section D for details). However, these approximations likely have only modest effect because our ultimate variable of interest is the MTR, which is bounded between zero and 35 percent. 26 This i m plies that any err o rs we m ake in discounting will have an attenuated effect on our MTR estimates (because the MTR cannot vary outside of the range from zero to 35 percent, no matter how we discount). To ensure that our results are not sensitive to the discount rate, we conduct several sensitivity analyses. Technically, option deductions could be discounted as options rather than pure equity. Therefore, weimplement an approach based on the contingent claims valuation outlined in Schwartz and Moon (2000). Specifically, we assume an earnings risk premium of two percent per year, grow stock prices at the risk freerate, and discount everything at the risk-free rate. In another set of robustness checks, we follow our standard simulation approach but discount using very high (e. g. double the CAPM market-model discount rate)and very low (e. g. the risk-free rate) discount rates. The empirical results indicate that the discounting assumption has only a second-order effect on the estimated MTR. For example, doubling the discount rate reduces the estimated MTR 120 basis points relative towhat we report below and does not change the qualitative results. The Schwartz and Moon (2000) approach reduces the estimated MTR by 100 basis points. All other robustness checks on the discount rate lead tosmaller changes in the estimated MTR. While conceptually important, the choice of discount rate only has a modest effect on our empirical estimates of the MTR. This reflects the fact that the magnitude of historic, current and very near-term option deductions are the dominant effects on current MTRs, more so than distant option deductions (for which the discount rate would be more important). AKU AKU AKU. Empirical Analysis of the Effect of Option Deductions on Corporate MTRs A. Descriptive Statistics Table I presents descriptive statistics for the stock option disclosures of the SampP 100 and Nasdaq 100 samples. For both groups, the average expected option life is close to five years, although it is slightly shorter forNasdaq firms, consistent with the higher volatility for Nasdaq firms, possibly coupled with risk aversion, precipitating early exercise. Not surprisingly, given GAAP reporting requirements, the risk-free rate is verysimilar for the two samples, equaling approximately 6 percent. The small difference in the risk-free rate for the two samples probably reflects differences in year-ends (because risk-free rates should be similar forfirms with common year-ends), with non-calendar year-ends more common for Nasdaq firms. Dividend yield averages 1.5 percent for SampP 100 firms with most firms paying dividends. Conversely, few Nasdaq 100 firms pay dividends the mean dividend yield is 0.1 percent and the 75th percentile is zero. Annual stock return volatility is higher for Nasdaq 100 firms, with a mean volatility of 75 percent versus 36 percent for the SampP firms. The volatility of returns is important because it affects the probability that stock price appreciates greatly, which would lead to large option deductions in good scenarios. Table II summarizes firm characteristics. Not surprisingly, the market capitalization of the typical SampP 100 firm is roughly five times larger than that for Nasdaq 100 firms. However, there is substantial overlap betweenthe two distributions, with the 75th percentile of Nasdaq firms being one-third larger than the 25thpercentile of SampP firms. The difference in size between the two subsamples is more pronounced for total assets, reflecting the fact that Nasdaq valuation is based more prominently on intangibles and growth options. In terms of profitability, the median return on assets (ROA) is quite similar for the two samples, and is actually a little higher for the Nasdaq firms (4.9 percent) than for the SampP firms (4.7 percent). The 75thpercentilesare also similar for the subsamples. However, the dispersion of profitability is higher for Nasdaq firms, with a much higher proportion reporting losses. In fact, the 25th percentile ROA is 3.4 percent for the Nasdaqfirms versus 1.5 percent for the SampP firms. Nasdaq firms tend to use less debt in their capital structure, with a mean (median) debt ratio of 6.7 percent (1.0 percent) versus 17.5 percent (13.4 percent) for the SampP firms. Both samples have average betas of approximately one, although the SampP firms are slightly below one while the Nasdaq firms have betas slightly above one. Figure 1 summarizes the overall effect of option deductions on the year-2000 corporate MTR (i. e. the effect of all historic and future exercises). The histogram shows MTRs for all 190 firms in our sample, with andwithout the effects of options. Options cause a significant shift in MTRs. Before options, 24 percent of the sample face MTRs of less than 10 percent while after considering options, 35 percent face such rates. Similarly, before options 65 percent of the sample firms face MTRs above 30 percent as compared with 46 percent after factoring in options. In the next two sections, we analyze the effects of options separately for SampP and Nasdaq firms, and break out the effects by historic versus future exercise activity. B. Tax Effects for SampP 100 Companies Table III presents evidence on the effects of option deductions on MTRs, segregated by sample. The first row contains estimated MTRs for fiscal year-end 2000, produced using standard tax deductions and deferredtaxes to infer taxable income, but before taking stock options into account. This computation is comparable to the one used in Graham (1996), with the only differences being that we bound income growth andvolatility to lie within the 25thand 75th industry percentiles and that we discount the tax consequences of option deductions with the cost of equity. The median MTR for the SampP 100 firms in 2000 is the top statutoryrate of 35 percent while the mean is 29 percent, which is consistent with prior studies that show clustering at the upper end of the statutory rates. The 25th percentile MTR is 32 percent, reflecting the fact that mostSampP 100 firms face relatively high tax rates. However, the 5thpercentile is zero, consistent with a few SampP 100 firms not expecting to pay any taxes over a 23-year period (e. g. after carrying losses in 2000 back two years to 1998 and forward 20 years to 2020). The next three rows of Table III illustrate the impact of stock option deductions on MTRs. Recall that there are several groups of stock option deductions: already exercised (second row: MTR w exercised options), already granted but not yet exercised (third row: MTR w current grants), and notyet granted (fourth row: MTR w future grants). For the SampP 100 sample, we find that incorporating stock options into the simulations has relatively little effect on the MTRs. In the fourth row of Table III, when alloption deductions are considered (including future grants and future exercises), the median MTR is still 35 percent. For the 25th percentile, the estimated MTR drops to 26 percent from 32 percent. The fifth row of Table III summarizes the change in MTRs brought about by option deductions (MTR w future grants). Inferences are the same. Options materially reduce MTRs for only about one-fourth of SampPfirms. When we consider all options, the mean reduction is 1 percent. Among the firms with the largest drop in tax rates, the 25th percentile MTR falls 1 percent and the 5thpercentile MTR decreases 5 percent. Even though employee stock option deductions do not substantially reduce the MTR for many SampP 100 firms, the deductions have a noticeable effect on corporate tax liabilities. The bottom two rows of Table IIIpresent gross deductions expressed in dollar terms and as a percentage of earnings before tax. The mean SampP firm had 640 million of option tax deductions in 2000. With 99 firms in the sample, this implies totaldeductions of 63.4 billion. With aggregate pretax earnings of approximately 349 billion for SampP 100 firms, stock option deductions represent nearly one-fifth of aggregate pretax income. Option deductions are 4 perce n t of pretax inco m e for the m edian fir m. 12 perce n t for the 7 5 th percentile, and 111 percent for the 95thpercentile. To summarize, SampP 100 firms substantially reduce their tax liabilities through deductions for nonqualified, employee stock options. However, while option deductions reduce tax rates for some firms, the tax savings do not translate into significantly lower MTRs for the typical (highly profitable) SampP 100 firm. Though option deductions slash their tax bills, only about one-fourth of SampP 100 firms have enough deductions to (i) fully offset the current years pre-option income and also eliminate the past two years of taxable income, (ii) generate losses in 2001 and 2002 that can be carried back to fully offset income in 2000, or (iii) for currently nontaxable firms, delay when tax consequences are realized for year-2000 option deductions. One or more of these conditions must be met for option deductions to reduce MTRs. C. Tax Effects for Nasdaq 100 Companies Options dramatically affect the MTRs of Nasdaq 100 companies. The median MTR before options is 31 percent and the mean is 20 percent (see the bottom panel in Table III), suggesting that Nasdaq firms have relatively high MTRs before the effects of options, though not as high as the MTRs of SampP 100 firms. For the median firm, just considering historic exercises reduces the MTR from 31 percent to 15 percent. Incrementally considering options that are already granted but not yet exercised reduces the median MTR from 15 percent to 8 percent. Considering all forms of option deductions, including those from future grants, reduces the m edian MTR all the way down to 5 percent. Considering all deductions, the 75 th percentile drops from 35 percent to 26 percent, indicating that option deductions affect most Nasdaq 100 firms. The proportion of Nasdaq firms with a MTR less than 0.05 increases from 33 percent to 50 percent. This increase implies that half of the Nasdaq 100 firms anticipate paying very little in corporate taxes from 1998 (the beginning of the two-year carryback period for 2000 losses) to 2020 (the end of the carryforward period for 2000 losses). Overall, the mean (median) decrease in MTRs is eight (two) percent. The size of the decline is limited by the fact that MTRs are bounded below by zero. In 2000, the median Nasdaq 100 firm enjoyed option-related tax deductions of 173 million, with a mean of 388 million. Aggregating across the 91 firms in our Nasdaq sample, the resulting deductions total about 35billion. This figure is striking because it is larger than the 13 billion of aggregate earnings before taxes and option deductions for the Nasdaq sample in 2000. Note that these large deductions do not eliminate all taxesfor the Nasdaq 100 because some firms have pre-option income that exceeds option deductions and others have deductions that expire unused however, it does indicate the enormous magnitude of the optiondeductions. Figure 2 summarizes the effect of options on the MTRs of Nasdaq firms. Before options are considered, 52 percent of Nasdaq firms face MTRs exceeding 0.30 after considering options, only 18 percent do. Almost 60percent of the Nasdaq 100 face post-option MTRs below 10 percent and almost 30 percent face MTRs of approximately zero. If one were to ignore option deductions, these figures imply that most Nasdaq companieswould reap substantial tax advantages from tax shields, such as interest. After considering option deductions, only a minority of Nasdaq firms has much of a tax incentive to finance with debt. IV. Empirical Analysis of the Effect of Option Deductions on Debt Policy The preceding section indicates that the effects of stock options on MTRs can be substantial, especially among option-intensive companies. These substantial effects imply that option deductions might affect corporate policies for which the MTR is an important decision variable. In this section we explore whether the effect of option deductions on MTRs is important to corporate debt policy decisions. This investigation has the potential to help explain why some firms appear to use too little debt when the effects of option deductions are ignored. A. Univariate Analysis of Debt Policy Table IV presents Pearson and Spearman correlations between pre-interest MTRs and various measures of debt in the capital structure, specifically, debt-to-market value, debt-to - assets, and interest-to-marketvalue. We examine pre-interest MTRs because Graham, Lemmon, and Schallheim (1998) show that corporate tax status is endogenously affected by debt policy. That is, when a firm uses debt, the associated interestdeduction reduces taxable income and can also reduce the MTR, which induces a spurious negative correlation between debt ratios and tax rates. This endogeneity can be avoided by using pre-interest MTRs (that is, tax rates based on earnings before interest and tax) when examining the relation between debt ratios and tax rates. The first row (column) in Table IV displays the Pearson (Spearman) correlation between the debt variables and conventional pre-interest MTRs (MTR wo options), i. e. before the effects of interest and options. For allthree measures, for both Spearman and Pearson correlations the coefficients vary in sign and are insignificant (except for the Pearson correlation on interestvalue, which is significant but has the wrong sign). Thesecorrelations provide little evidence that capital structure is correlated with MTRs for our sample when we ignore options deductions. The second row and column show the relation when the computation of pre-interest MTRs is modified to include all employee stock option deductions (MTR w future grants). The relation is positive for all three debtvariables. For the Spearman correlations, the correlations range from 0.25 to 0.34 and are always significant at the 0.01 level. These results are consistent with managers making financing and compensation decisionsjointly, considering the effect of options on MTRs. 27 The third row and column present the correlations between the change in pre-interest MTRs resulting from options (MTR w future grants) and the other variables. Two points are worth noting. First, the correlation between the decrease in rates and the post-option MTRs is strongly positive, indicating that options have a significant effect on MTRs. Second, the decrease in rates is positively correlated with the amount of debt in the capital structure. This correlation implies that firms that use options intensively enough to reduce their MTR use relatively little debt, which is consistent with firms trading off options and interest deductions. B. Regression Analysis To further assess the relation between option deductions, MTRs and debt, Table V presents tobit regressions with debt-to-value as the dependent variable.28We use the tobit method because the debt ratio equalszero (i. e. is left-censored) for 17 firms in our sample. Since determining a debt ratio for a financial institution is problematic, we delete the 40 firms that have a primary or secondary division that is financial (2-digit SICcode between 60 and 69). For deletion, we require that the financial division contribute at least 10 to total firm revenue. This process leaves 150 firms (down from the 190 included in Section II). The first two columns of Table V are univariate and regress debt-to-value on MTR wo options and MTR w future grants, respectively. Like the correlation coefficients presented in Table IV, the coefficient on the MTRvariable, when all stock options are ignored, is insignificant. The coefficient on the MTR variable, when stock options are considered, is significantly and positively correlated with the debt ratio at the 0.01 level (seecolumn 2). In addition to being statistically significant, the coefficient estimate on the MTR variable is economically large. For example, consider the predicted debtvalue ratios for firms at the 25th and 75thMTR w future grantspercentiles (MTRs of 2.3 and 35.0, respectively). We gauge economic significance using the slope coefficient estimate of 0.23, the intercept of 0.05, and a tobit adjustment factor of 0.88 that accounts for the effectof using a censored normal distribution (Maddala (1983)). The implied debtvalue ratio is 0.049 (the 23rddebtvalue percentile) for a firm at the 25th MTR percentile, versus 0.115 (the 61st debtvalue percentile) for afirm at the 75th MTR percentile.29In other words, moving from the 25th percentile to the 75th percentile in the MTR distribution, the implied amount of debt in the capital structure more than doubles, from wellbelow the debtvalue median to well above. A number of nontax factors can affect debt policy, and it is important to control for these potential influences in a multivariate analysis. Controlling for such influences helps isolate tax effects and minimizes thepossibility that the tax variable proxies for some other factor. For example, financially weak firms face lower tax rates and also might face barriers to borrowing and therefore use options to save cash. It seems unlikelythat this condition drives the correlation between debt and tax rates because if the issue is simply that less profitable firms are less able to obtain debt financing, the relation between debt and MTRs before optionsshould be significant, but it is not. However, to ensure that differences in financial health do not drive our results, we include controls for financial strength in the regression: operating cash flow divided by assets andthe quick ratio. We also control for three other factors that are commonly thought to drive debt policy (see Rajan and Zingales (1995)): growth options, asset tangibility, and firm size. Firms with extensive growth options might useless debt to avoid the underinvestment problem (Myers (1977)). Shareholders of a firm with risky fixed claims in its capital structure will potentially underinvest by forgoing positive NPV investments because projectbenefits might accrue to the firms existing bondholders this problem is likely to be more severe among growth firms. Therefore, we expect firms with growth options, which we measure with research and development expense divided by sales, to use less debt. In contrast, firms with more tangible assets, as measured by property, plant and equipment divided by total assets, are less subject to underinvestment and informational asymmetry problems, and also have more assets to collateralize, and therefore can use more debt. Finally, largerfirms are thought to have better access to debt markets, which allows them to borrow more. We therefore expect a positive relation between debt ratios and firms size, which we measure with sales revenue. Note that data are missing for at least one of these explanatory variables for three observations, so the regressions that include control variables have 147 observations. Finally, though not shown in the tables, everyregression specification includes five industry dummy variables based on 2-digit SIC codes. We choose these five industries by performing a regression that includes a dummy for each 2-digit SIC code, and thenretaining the five that are significant: SIC codes 26 (paper and allied products), 40 (railroads), 48 (communications), 49 (utilities), and 78 (amusements). The third through sixth columns of Table V report results for tobit regressions that include tax rates and the control variables. To reduce any potential effect of endogeneity between debt policy and the explanatory variables, we use the lagged values of the control variables. The coefficients on the control variables have the correct signs and are generally significant. These estimated coefficients indicate that firms with many tangible assets use more debt but firms with substantial growth options (as measured by RampD) use less debt. Also, consistent with a pecking - order view (Myers and Majluf (1984)), firms with more cash flow use less debt. Finally, large firms use more debt than do small firms. More importantly for this study, in the third column, the control variables increase the significance of the pre-option tax rate, although it is only marginally significant at conventional levels (p-value of 0.07). In thefourth column, the coefficient on the tax rate that includes the effects of historic option deductions (MTR w exercised options) is larger and more significant than the no-options tax rate (p-value of 0.03). In the nexttwo columns, coefficients on the tax rates that consider the effects of currently granted options (fifth column) and also future option grants (sixth colu m n) are both significant at the 0.01 level. 30 The incr e asing statistical significance of the tax variables highlights the influence of stock option deductions on MTRs and debt policy. The rightmost column of Table V presents a specification that includes the control variables, the tax rate variable that ignores options, and the difference between the no-options tax rate and the MTR w future grants. By using two tax variables, we are able to examine the effects on debt policy oftraditional tax effects separately from the incremental effect of options. In this specification, the MTR wo options tax variable is significant at the 0.01 level, and the incremental effect of options is significant at the0.06 level, and both coefficients have the expected sign. The fact that the coefficient on MTR wo options becomes significant in the presence of the MTR wfuture grants variable is striking because it suggests thatthe effect of non-option factors is strengthened once options are accounted for. Further, the coefficients on the MTR wo options and MTR wfuture grants variables are similar suggesting that both option - relatedand non-option-related tax effects are of comparable importance in determining debt policy. Thus, we conclude that taxes affect capital structure decisions for reasons unrelated to, as well as directly related to, deductions that result from employee stock options. C. Robustness Checks of Regression Results We perform a number of robustness checks that consist of adding additional control variables or estimating the regressions on subsets of the data (see Table VI). Though the estimated coefficients are not shown in Table VI, the control and industry dummy variables from Table V are included in all of the Table VI specifications. First, we examine the tax variable based on Value Line growth estimates and stock price forecasts, rather than using historical data to estimate income growth and the CAPM to estimate stock returns. The leftmost column of Table VI indicates that the Value Line tax variable coefficient is 0.21 (and significant at the 0.01 level), which is identical to the base case results in Table V. Second, we include an SampP dummy variable (second column of Table VI). Suppose that our results are explained by differences between Nasdaq and SampP firms. Nasdaq firms may have low debt because of a nontaxeffect (e. g. perhaps because they have substantial growth options) and a low tax rate (possibly because growth firms often are currently or have recently been unprofitable). SampP firms may have high debt ratios andhigh tax rates. If so, then including an SampP dummy could cause the tax variable to be insignificant. In fact, the tax variable is less significant when the SampP dummy is included but it is still significant (p-value of 0.06). The third column summarizes the results of including stock volatility as a right-side variable. Firms with volatile returns might be considered risky and therefore have higher costs of debt and borrow less. The sign ofthe volatility coefficient is negative and consistent with this hypothesis but it is not significant. Importantly, the tax variable is still positive and significant even when the stock volatility variable is included as acontrol. The fourth column shows the results when a control variable measuring the dollar value of deductions, scaled by assets, is included. The purpose of this control is to rule out the possibility that the debt ratio is relatedsolely to a firms option intensity. The positive coefficient on the tax variable (p-value of 0.08) provides some assurance that the effect of the options on the MTRs has incremental value beyond merely identifyingoption-intensive firms. The fifth column of Table VI uses debt minus cash as the dependent variable. This allows negative debt for firms that have large cash holdings but very little or no debt, such as Microsoft. Because the dependentvariable is no longer censored at zero, we estimate the model with OLS. Again, the tax coefficient is positive and significant in this alternative specification. The sixth through tenth columns of Table VI show the results from performing the main regression specification on different subsets of data. The intent of these five specifications is to investigate whether thesignificant tax results might be driven primarily by the contrasting behavior of two types of firms (e. g. unprofitablelow-taxlow-debt versus profitablehigh - taxhigh-debt), or whether the tax effects also occur forsubsets of somewhat homogeneous firms for which theory predicts there should be tax effects. The sixth column investigates the 130 firms that report positive debt. We test whether option-affected tax rates provide a positive incentive to use debt for these firms. The tax coefficient in the sixth column (from an OLS regression) indicates that high tax rate firms do indeed use more debt than low tax rate firms. In the seventh column, we examine tax effects for the 120 firms that were profitable in 2000, to make sure that our overall results are not driven strictly by profitablehigh-tax firms using more debt than losslow-tax firms, perhaps for nontax reasons (like accessibility to debt markets). The next two columns further explore the accessibility of debt markets by considering firms that have an SampP bond rating (100 firms in column eight) or have an investment grade bond rating (72 firms in column nine). For all three subsets of these firms we find a positive and significant tax variable. Finally, in the rightmost column we examine the 101 firms that have annual growth in taxable income of at least 3.6 (the sample mean). Again, the tax variable is positive and significant. Overall, the results in Tables V and VI indicate that taxes exert a positive effect on the use of debt and that options use exerts a negative effect. These results are robust to a number of different specifications andsubsamples. D. The Relation Between Stock Option Deductions and Debt Conservatism The preceding sections link stock options and debt policy by documenting improved statistical power in detecting tax effects when MTRs incorporate option deductions. In this section we examine a direct measure ofdebt conservatism and test whether firms that appear to have the most unused debt capacity (when option deductions are ignored) use option deductions to reduce tax liabilities. Graham (2000) develops a measureof debt conservatism that he refers to as kink. Kink measures the proportion by which a firm could increase interest deductions without experiencing reduced marginal tax benefits for interest deductions. Forexample, consider a firm with EBIT of 2 million or more in every state of nature. If this firm has interest expense of 0.5 million (and we ignore carryforwards and carrybacks), it has a kink of 4.0 because it could quadruple interest deductions and still enjoy the full tax-reducing benefit of interest deductions in every state. (That is, even if it quadruples interest, the firm will not experience a tax loss in any state, so all taxbenefits are enjoyed in the current year). Graham notes that many large profitable firms, which presumably face small costs of debt financing, have large kinks and appear to potentially be underlevered. Grahamsanalysis, however, does not incorporate option deductions. We calculate kink for our sample firms based on pre-option income. (For computational reasons, we restrict the maximum kink to 8.0, as in Graham (2000)). The median (mean) kink is 8.0 (5.3) for our sample, whichappears to indicate debt conservatism. However, we uncover evidence consistent with conservative firms (i. e. those with large kinks) substituting option deductions in place of interest. The Pearson correlation inTable IV between kink and reduction in MTR is 0.23 (significant at 0.01 level), indicating that option deductions have the largest effect on MTRs for firms with large kinks (i. e. firms that appear to have the mostunused debt capacity when option deductions are ignored). Similarly, the Pearson correlation between option deductionsvalue and interestvalue is 0.28, which is consistent with firms substituting between optiondeductions and interest. Finally, when we recalculate kink based on EBT that subtracts options deductions, the mean kink falls to 4.3 from 5.3 (though the median kink remains at 8.0). The fact that the mean kink fallsby one-fifth indicates the importance of the economic effect of stock option deductions on capital structure. Overall, this evidence is consistent with firms that appear debt conservative (when options are ignored) using option deductions heavily in place of interest. However, the large mean kink of 4.3 (even after optiondeductions are considered) indicates that employee stock option deductions offer only a partial explanation for the conservative use of debt. Additional research is needed to more fully understand the apparentlyconservative debt policy at many firms. The tax deduction for nonqualified employee stock options is unusual. The company has little control over its timing or amount. Instead, the corporate deduction is delayed until employees choose to exercise. Theamount of the deduction is determined by the firms stock price years after the options are granted. This paper develops an approach for evaluating the complex and uncertain tax benefits associated with employeestock options, impounds the corporate tax savings in MTRs, and assesses the effects of the option deduction on debt policy. Incorporating option information from financial statement disclosures into Grahams (1996) MTR simulations, we compute MTRs that take account of option deductions. We then compare these firm-specific rates withcompanies debt levels in an attempt to assess the relation between tax shields associated with leverage and tax shields associated with option compensation. We find that employee stock options substantially reduce corporate taxes for both the industrial SampP 100 and the high-technology Nasdaq 100. For the more option-intensive Nasdaq 100, stock options dramatically reduce estimated MTRs, with the median rate tumbling from 31 percent to 5 percent. Consistent with the concerns raised in Hanlon and Shevlin (2002), our findings raise doubts about the usefulness of conventionalMTRs, which ignore stock option deductions. Unfortunately, developing MTRs that impound option deductions from public sources is costly because the option data must be hand-collected from financial statements. Because scholars, policymakers, practitioners, and analysts, among others, need MTRs for option-intensive companies, future research should consider developing a low-cost method of estimating MTRs thatincorporates the effects of stock option deductions. We document a positive relation between leverage and post-option MTRs. Moreover, we find that firms that use little debt also use options extensively. These results provide at least a partial explanation forconservative debt usage at highly profitable, option-intensive firms, such as Microsoft and Dell. By presenting evidence that options provide an important non-debt tax shield that substitutes for interest in the spiritof DeAngelo and Masulis (1980), this paper extends our understanding of the role of taxes in financial decisions. Cipriano, M. D. Collins, and P. Hribar, 2001, An empirical analysis of the tax benefit from employee stock options, Working paper, University of Iowa. Core, J. and W. Guay, 2001, Stock option plans for non-executive employees, Journal of Financial Economics 61, 253-287. DeAngelo, H. and R. Masulis, 1980, Optimal capital structure under corporate and personal taxation, Journal of Financial Economics 8, 3-29. Desai, M. 2002, The corporate profit base, tax sheltering activity, and the changing nature of employee compensation, Working paper, Harvard University. Easton, P. and T. Harris, 1991, Earnings as an explanatory variable for returns, Journal of Accounting Research 29, 19-36. Fama, E. and K. French, 2002, The equity premium, Journal of Finance 57, 637-659. Graham, J. R. 1996, Debt and the marginal tax rate, Journal of Financial Economics 41, 41-73. Graham, J. R. 2000, How big are the tax benefits of debt Journal of Finance 55, 1901-1941. Graham, J. R. 2003, Taxes andcorporate finance: A review, Review of Financial Studies 16, forthcoming. Graham, J. R. and C. R. Harvey, 2002, Expectations of equity risk premia, volatility, and asymmetry from a corporate finance perspective, Working Paper, Duke University. Graham, J. R. M. Lemmon and J. Schallheim, 1998, Debt, leases, taxes, and the endogeneity of corporate tax status, Journal of Finance 53, 131-161. Hall, B. and J. Liebman, 2000, The taxation of executive compensation, in James Poterba, ed.: Tax Policy and the Economy 14 (MIT Press, Cambridge, Massachusetts). Hanlon, M. and T. Shevlin, 2002, Accounting for the tax benefits of employee stock options and implications for research, Accounting Horizons 16, 1-16. Huddart, S. and M. Lang, 1996, Employee stock option exercises: An empirical analysis, Journal of Accounting and Economics 21, 5-43. Kahle, K. and K. Shastri, 2002, Firm performance, capital structure, and the tax benefits of employee stock options, Working Paper, University of Pittsburgh. Maddala, G. S. 1983, Limited Dependent and Qualitative Variables in Econometrics (Cambridge University Press, Cambridge, U. K.). McDonald, R. 2002, The tax (dis)advantage of a firm issuing options on its own stock, Working Paper, Northwestern University. Modigliani Franco, and Merton Miller, 1958, The cost of capital, corporate finance and the theory of investment, American Economic Review 48, 261-297. Myers, S. 1977, Determinants of corporate borrowing, Journal of Financial Economics 3, 799- Myers, Stewart, and Nicholas Majluf, 1984, Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics 13, Plesko, G. 2003, An evaluation of alternative measures of corporate tax rates, Journal of Accounting and Economics forthcoming. Rajan, R. G. and L. Zingales, 1995, What do we know about capital structure choice Some evidence from international data, Journal of Finance 50, 1421-1460. Scholes, M. Wolfson, M. Erickson, M. Maydew, E. and T. Shevlin, 2002, Taxes and Business Strategy: A Planning Approach (Prentice Hall, Upper Saddle River, N. J.). Schwartz, E. and M. Moon, 2000, Rational pricing of internet companies, Financial Analysts Journal 56:3, 62-75. Shevlin, T. 1990, Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses, Journal of the American Taxation Association 12, 51-67. Sullivan, M. 2002, Stock options take 50 billion bite out of corporate taxes, Tax Notes, March 18, 2002, 1396-1401. Microsofts Stock Option Plan Footnote for the year ended June 30, 2000 The Company has stock option plans for directors, officers, and employees, which provide for nonqualified and incentive stock options. Options granted prior to 1995 generally vest over four and one-half years and expire 10 years from the date of grant. Options granted during and after 1995 generally vest over four and one-half years and expire seven years from the date of grant, while certain options vest either over four and one-half years or over seven and one-half years and expire after 10 years. At June 30, 2000, options for 341 million shares were vested and 734 million shares were available for future grants under the plans. Stock options outstanding were as follows: For various price ranges, weighted average characteristics of outstanding stock options at June 30, 2000 were as follows: The Company follows Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for stock option and employee stock purchase plans. An alternative method of accounting for stock options is SFAS 123, Accounting for Stock-Based Compensation. Under SFAS 123, employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. Had compensation cost for the Company8217s stock option and employee stock purchase plans been determined as prescribed by SFAS 123, pro forma income statements for 1998, 1999, and 2000 would have been as follows: The weighted average Black-Scholes value of options granted under the stock option plans during 1998, 1999, and 2000 was 11.81, 20.90, and 36.67. Value was estimated using a weighted average expected life of 5.3 years in 1998, 5.0 years in 1999, and 6.2 years in 2000, no dividends, volatility of 0.32 in 1998 and 1999 and 0.33 in 2000, and risk-free interest rates of 5.7 percent, 4.9 percent, and 6.2 percent in 1998, 1999, and 2000. Descriptive Statistics on Option Characteristics All variables are from the Black-Scholes option valuation assumptions in the company financial statement footnotes. Expected life is years from grant until average exercise. The risk-free interest rate is the rate on zero-coupon U. S. government issues with remaining term equal to the expected life of the options. Dividend yield is dividends as a percentage of share price. Annual return volatility is the standard deviation of the continuously compounded rates of return on the stock (i. e. standard deviation of the difference in the natural logarithm of stock prices). Descriptive Statistics on Firm Characteristics Asset is total assets. Market equity is the value of common equity at fiscal year-end. Return on assets is net income divided by assets. DebtValue is total debt divided by the market value of the firm. Beta is themarket-model beta as reported on CRSP. Effect of Employee Stock Option Deductions on Marginal Tax Rates This table summarizes the effect of option deductions on corporate marginal tax rates (MTRs) for all 190 firms for which we can calculate tax rates. MTR wo options is a simulated MTR, assuming there are no employeestock option deductions, based on earnings before tax (EBT). A simulated MTR accounts for the tax-loss carryback and carryforward features of the tax code. MTR w exercised options is the simulated rate except thathistoric deductions from options exercised in 1998, 1999, and 2000 are subtracted from EBT. MTR w current grants is the simulated MTR, with historic deductions and future deductions associated with already grantedoptions deducted from EBT. MTR w future grants is the simulated MTR, with historic deductions, future deductions for already granted options, and deductions for not-yet-granted options deducted from EBT. MTRw future grants is MTR w future grants minus MTR wo options, so a negative number indicates that option deductions lead to a reduction in the tax rate. 2000 Stock Option Deductions is the dollar figure (in millions)of option deductions in 2000. 2000 Deductions Pretax Income is 2000 deductions divided by pre-option EBT. The columns show the mean and standard deviation across all sample firms, as well as the 5 th. 2 5 th. 5 0 th. 7 5 th. a n d 9 5 th percentiles. Correlations Between MTRs and Leverage for Combined Sample of SampP 100 and Nasdaq 100 Firms in 2000 Pearson (Spearman) correlations between corporate MTRs and various measures of debt policy appear above (below) the main diagonal. MTR wo options is a simulated MTR, assuming there are no employee stockoption deductions, based on earnings before tax (EBT). MTR w future grants is the simulated MTR, with historic deductions, future deductions for already granted options, and deductions for not-yet-granted optionsdeducted from EBT. MTR w future grants is MTR w future grants minus MTR wo options. Debt-to-value is total debt divided by the market value of the firm, where market value equals book assets minus bookequity plus market equity. Debt-to-assets is total debt divided by total assets. Interest-to - value is debt interest divided by market value. Deductions-to-value is the dollar amount of option deductions in 2000 dividedby market value. Kink in the proportion by which interest could be increased before the value of incremental interest deductions would begin to fall. Kink is calculated as in Graham (2000) using pre-option earnings. Ahigh value for kink can be interpreted to mean that a firm has unused debt capacity (ignoring the effect of option deductions). These correlations are for the 150 firms included in the regression analysis. , , means statistically different from zero at the 0.01, 0.05, and 0.10 levels, respectively. Significance for the tax variables tests whether the correlation coefficient equals zero versus the alternative that the coefficient isgreater than zero. Tobit Regressions of Debt-to-Value on Marginal Tax Rates and Control Variables Results are from cross-sectional regressions using data from 2000. The dependent variable is Debt-to-value (total debt divided by the market value of the firm, where market value equals book assets minus book equity plus market equity). MTR wo options is a simulated MTR, assuming there are no employee stock option deductions, based on earnings before tax (EBT). MTR w exercised options is the simulated rate exceptthat historic deductions from options exercised in 1998, 1999, and 2000 are subtracted from EBT. MTR w current grants is the simulated MTR, with historic deductions and future deductions associated with alreadygranted options deducted from EBT. MTR w future grants is the simulated MTR, with historic deductions, future deductions for already granted options, and deductions for not-yet-granted options deducted from EBT. MTR w future grants is MTR w future grants minus MTR wo options. PPampEAssets is property, plant, and equipment divided by total assets. Quick ratio is cash plus receivables, the sum divided by current liabilities. Cash Flow is operating cash flow divided by total assets. RampD is research and development expense divided by sales. Sales is sales revenue. Five significant 2-digit SIC code dummies are included in all specifications but are not shown in the table. Regression coefficients and P-values (in parentheses) are shown. More Regressions of Debt-to-Value on Marginal Tax Rates and Control Variables Results are from cross-sectional regressions using data from 2000. The dependent variable is Debt-to-value (total debt divided by the market value of the firm, where market value equals book assets minus bookequity plus market equity). MTR w future grants is the simulated MTR, with historic deductions, future deductions for already-granted options, and deductions for not-yet-granted options deducted from EBT. MTR wfuture grants (Value Line) is the same simulated tax variable, based on stock price and growth projections from Value Line. SampP dummy is an indicator variable that takes on a value of one for SampP firms and zero for Nasdaq firms. Stock Volatility is the volatility of stock returns. Option DeductionsAssets is the dollar value of tax deductions from employee stock options divided by total assets. Though not shown in the table, eachregression includes PPampEAssets, Quick ratio, Cash Flow, RampD, Sales, and five 2-digit SIC code dummies. Regression coefficients and P-values (in parentheses) are shown for the tax variable(s) and new controlvariables. The rightmost five columns summarize regressions that include, respectively, only firms that have nonzero debt, earnings greater than zero, an SampP bond rating, an investment grade bond rating, and annualgrowth larger than the mean growth in taxable income for the sample (3.6). The four leftmost columns include all firms with nonmissing values for the explanatory variables. The regressions are all tobitspecifications, except for the Dep vardebt-cash and Debtgt0 columns, which are OLS. debt-cash allows negative debt because the dependent variable is total debt minus the firms cash holdings, the quantitydivided by the market value of the firm. Corresponding author: Fuqua School of Business, Duke University, Durham NC 27708-0120, (919) 660-7857 (phone), (919) 660-8038 (fax), john. grahamduke. edu We appreciate excellent research assistance from Courtney Edwards, Allison Evans, Laura Knudson, and Julia Wu and insightful comments from an anonymous referee, Alon Brav, John Core, Richard Frankel, DavidGuenther, John Hand, Mike Lemmon, Ed Maydew, Hamid Mehran, Vikas Mehrotra, Dan Rogers, Richard Sansing, Jim Schallheim, Jake Thomas, Mike Weisbach, workshop participants at the University of Colorado, Cornell, Duke, MIT, the University of North Carolina, Wharton and audience participants at the 2003 American Accounting Association and American Finance Association meetings. Bob McDonald and Terry Shelvinscomments were especially helpful. All data are publicly available. Lang was visiting the University of Queensland when the first draft of this paper was completed. Graham acknowledges financial support from theAlfred P. Sloan Research Foundation. 1We use a Scholes et al. (2002) MTR that accounts for the present value of current and future tax consequences associated with changes in todays income. 2It is important to note that this amount does not imply a reduction in overall tax revenues because it fails to take into account the increase in individual tax burdens associated with option exercise. In particular, employees exercising nonqualified options face potential tax obligations for the difference between the market and strike price at the time of exercise. 3Strictly speaking, our results are consistent with managers trading off interest and option deductions in 2000. In other years, when option deductions are less important, tax planners may accelerate non-option deductions. It would be interesting for future research to investigate whether managers trade off non-option deductions with interest in eras where option deductions are less prominent. 4 State m ent of Financial Accounting Standards (SFAS) 123 per m its fir m s t he choice of either expensing stock options on the income statement or disclosing in the footnotes the effect stock options would have had if expensed. In 2000, it was extremely rare for a firm to expense stock options on the income statement, with the vast majority of firms opting for footnote disclosure. If a firm opted not to expense options, it was not permitted toreduce tax expense for the deductions related to option exercise. The underlying logic was that, since the original charge did not reduce pretax income, the tax benefit at exercise should not decrease tax expense. 5Tax benefits from option deductions are sometimes explicitly reported on two financial statements: the statement of cash flows and the statement of shareholders equity. However, tax benefits from options are not always reported as a separate lineitem and instead are often aggregated with another item on these statements. 6In 1998, the most recent year for which IRS data are available, the firms in our sample had tax expense equal to more than one-third of the taxes paid for the entire corporate sector. 7Of the three missing companies, two are foreign companies (Erickson and Checkpoint). The other (JPM) is not listed on Edgar for unspecified reasons. 8In the sample, 124 firms have December 2000 year-ends, and 22 have year-ends between September and November 2000. Another 20 have year-ends in 2000 earlier than September, and in eight of these cases we use 1999 data because the year-end is in May (and 10-Ks for fiscal year 2000 were not available when we collected the data). Finally, the remaining 24 companies have year-ends between January and May 31, 2001. 9To estimate the effects of the stock market run-up, we perform a robustness check in which we assume that historic stock prices and returns, as well as historic grant and exercise prices, are only half what they actually were. Even with dampened stock prices, the sheer number of options granted and exercised is such that this robustness check produces a mean tax rate that is only 40 basis points higherthan the base case tax rate we report below. 10Stock option deductions can show up in our pre-option measure of taxable income if they affect deferred taxes. This should only occur when option deductions contribute to tax loss carryforwards (Hanlon andShevlin (2002)). Due to data limitations, we are unable to determine the extent to which this occurs in our sample. Therefore, in our main analysis we assume that option deductions do not affect deferred taxes. Wealso perform an unreported robustness analysis in which we do not adjust income for deferred taxes, thereby guaranteeing that options do not affect our pre-option earnings figure. Relative to the base case resultsreported below, the mean tax rate is 70 basis points lower in this no deferred taxes adjustment analysis but the qualitative implications are unchanged. 11See Plesko (2003) for a comparison of the actual MTR based on the tax return versus estimated tax rates based on financial statement data, such as the simulation tax rate used in this paper. Note that Pleskos analysis ignores potentially important dynamic features of the tax code, such as tax loss carrybacks and carryforwards, by using a static tax return tax rate as the benchmark. Nonetheless, Plesko concludes that, of the various tax variables he considers, the simulated tax rate is the most highly correlated with tax return tax rates. 12This approach is consistent with the common procedure of using industry inputs when calculating a firms cost of capital. Note that our qualitative results do not change if we do not bound growth rates andvolatility to lie within the respective industry interquartile ranges, nor if we set each firms growth and volatility equal to industry medians. 13Specifically, SFAS 123 states that the fair value of a stock option (or its equivalent) granted by a public entity shall be estimated using an option-pricing model (for example, the Black - Scholes or a binomial model)that takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock , and the risk-freeinterest rate for the expected term of the option. Appendix B of SFAS 123 provides detailed guidance on estimating the inputs into the valuation formula, and firms are required to disclose the assumptions used invaluation. 14Most companies with multiple plans combine all plans into one aggregate disclosure. In the 12 cases in which firms separate information across plans, we aggregate shares and use weighted averages of variablessuch as share price and expected term to exercise. Similarly, exercise decisions are disclosed separately for 13 sample firms (e. g. cancellations separated from forfeitures or reloads separated from new grants), and Black-Scholes assumptions are disclosed separately for 15 firms (e. g. different expected lives for executives relative to non-executive employees). Again, we aggregate the disclosures and use a weighted average of the variables, weighted by the number of options in the respective plan. Twenty-eight companies disclose a range for Black-Scholes assumptions, and five disclose a range of exercise prices rather than a weighted average, perhaps reflecting the fact that they use different assumptions for different groups of employees. In these cases, we use the midpoint of the range because sufficient detail is not available to calculate a weighted average. Finally, eight firms disclose dividends per share rather than dividend yield. In these cases, we compute dividend yield based on year-end share price. In total, 73 firms report in one of these nonstandard formats. If we exclude these 73 firms, the mean tax rate increases by approximately 150 basis points, but the overall implications of our study do not change. 15For example, using the Microsoft footnote disclosure in the appendix for the year ended June 30, 2000, we estimate the 2000 tax deduction for stock options to be 13,925,340,000, which is the product of the 198 million options exercised and the difference in the weighted average grant price of 79.87 and the weighted average strike price of 9.54. 16We do not explicitly incorporate vesting schedules because the stock option footnotes are often vague and indicate a range of vesting periods. Further, our use of expected lives should incorporate the effects of vesting. To get a sense for the typical vesting schedule, we gather the available information from the option footnotes. The average vesting period (using the midpoint when a range is indicated) is 3.5 years for our sample firms, and most firms indicate that vesting occurs ratably over time, typically beginning within the first year. As a result, our assumption that option exercise is spread over the period beginning two years priorto and ending two years following the expected life (4.8 years on average) seems consistent with the likely vesting schedules. Huddart and Lang (1996) suggest that exercise is common immediately following vestingdates. On another note, it is possible that in 2000 the expected option life that companies report in the footnotes is low by historic standards, due to the bull market of the 1990s, which may have encouraged earlyexercise and shorter option lives. To investigate how a longer expected life would affect our results, we perform a robustness check in which we add two years to the expected life of all options. The mean estimatedtax rate in this analysis is only 20 basis points higher than what we report below, and overall qualitative results are unchanged. 17For example, the Microsoft footnote disclosure in the appendix reports a weighted average expected life of 6.2 years, and an expiration of 10 years, for options granted in 2000. Thus, we assume the optionsgranted in 2000 will be exercised evenly over the period from 2004 to 2008 if they are in the money by at least 15 percent during those years. If they are not in the money by 15 percent, exercise is deferred until thefirst year in which they are in the money by 15 percent. In 2010 (the presumed date of expiration), all options that remain outstanding are exercised if they are in the money by any amount. 18For example, the Microsoft footnote disclosure in the appendix reports grants (cancellations) of 138 (25) million in fiscal year 1998, 78 (30) in 1999, and 304 (40) in 2000. We assume that fiscal year 2001 grants are141.7 million (i. e. 173.3 million (the mean of 1998, 1999, and 2000 grants) less 31.6 million (the mean of 1998, 1999, and 2000 cancellations)) times a growth factor. 19In unreported analysis, we find qualitatively similar results when we perform our calculations based on sales revenue growth, rather than income growth. Sales growth rates are typically much larger than incomegrowth rates in our sample, so we use the latter so that our future options grant numbers are conservative. 20In a robustness check, we use an estimated risk premium of 8.1 (the Ibbotson historic average). This premium leads to a mean tax rate that is 40 basis points lower than the base case mean reported below. Allresults are qualitatively similar whether we use an 8.1 or a 3 risk premium. 21While we directly link growth of earnings and expected stock prices, we do not directly link realized future earnings and stocks prices. That is, we use the realized draw for earnings growth on a given earnings pathfor a given period (15 percent in our example) to determine the mean expected stock price growth for that period on the associated stock price path (18 percent in our example). However, on top of that mean, we layer a variance based on the past returns series and draw a return from that distribution. The resulting realized return can be substantially different from 18 percent because of high return variances. In fact, thecorrelation of simulated earnings and simulated stock prices is approximately 15 percent in our analysis, which puts our simulated correlation in line with that observed empirically by Easton and Harris. 22A related issue is the potential that management makes decisions based on unrealistic or optimistic expectations of future returns. We do not believe that reasonable alternative management beliefs would greatly alter our results. For example, if we set the expected return to 15 and halve the variance of expected returns to capture optimistic managerial beliefs, the mean tax rate falls by only 13 basis points relative towhat is reported below. 23Since the annual stock price is based on log returns, implied prices cannot be negative. Note also that if we assume that volatility is 25 for all firms (rather than using the volatility firms report in the footnotes), the mean tax rate is only 10 basis points different from that reported below in the base case. 24While the per-share option deduction is directly the result of stock price appreciation, the correlation between option deductions and contemporaneous-year returns is likely to be well below one for at least two reasons. First, options are typically exercised in about the fifth year of their lives and the per-share deduction is determined by the multi-year return, so the current year return is a relatively small part of thededuction. Second, the number of options exercised is a function of many factors beyond current year return (e. g. prior exercise, cancellation, marketstrike ratio and liquidity concerns), so the current year returnmay be high but exercise low because employees opt not to exercise. 25 W e thank Terry Shevlin for pointing out these incentive possibilities. W e thank Bob McDonald for suggesting the basic framework that we discuss next. 26We thank Bob McDonald for pointing this out. 27This interpretation is consistent with our conversations with tax managers at several high - technology companies. Although these firms appear profitable based on their income statements, the managers indicatethat debt is not particularly attractive because the company pays little in taxes. Similarly, this result may explain why Microsoft and Dells derivatives trading is not as tax-inefficient as implied by the effective tax ratesreported in their financial statements (McDonald (2002)). 28A potential concern is that share price movements can affect both the debt-to-value ratio and stock option deductions (and hence MTRs). To investigate this issue, we also estimate the regressions with debt-to-assets replacing debt-to-value. Consistent with the high correlation between debt-to-value and debt-to-assets in Table IV, regression results for debt-to-assets are qualitatively similar to those for debt-to-valuethough weaker statistically. 29 The calculation is 0.88 x (0.055 0.23 x 0.023) 0.049 and 0.88 x (0.055 0.23 x 0.350) 0.115. 30 The adjusted-R2 is 60 percent in an OLS version of the regression in the sixth column. Previously published by the Duke University, June 2003 We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and SampP 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31 percent to 5 percent. For SampP firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt. FORTHCOMING in the Journal of Finance in 2004 Employee Stock Options, Corporate Taxes and Debt PolicyEmployee Stock Options, Corporate Taxes, and Debt Policy We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and SP 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31 to 5. For SP firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt. Copyright 2004 by The American Finance Association. Jika Anda mengalami masalah saat mendownload file, periksa apakah Anda memiliki aplikasi yang tepat untuk melihatnya terlebih dahulu. Jika terjadi masalah lebih lanjut baca halaman bantuan IDEAS. Perhatikan bahwa file-file ini tidak ada di situs IDEAS. Mohon bersabar karena berkasnya mungkin besar. Karena akses ke dokumen ini dibatasi, Anda mungkin ingin mencari versi yang berbeda berdasarkan penelitian terkait (lebih jauh di bawah) atau mencari versi yang berbeda. 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