Taxation and the value of employee stock options
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 22 February 2011
Abstract
Purpose
This paper aims to derive firm value implications for various kinds of employee stock options (ESOs) in a framework that considers uncertainty, non‐diversification and the US statutory tax treatment.
Design/methodology/approach
The authors extend the analysis of ESOs from the case of perfect capital markets to two cases of imperfect capital markets using the Benninga‐Helmantel‐Sarig framework.
Findings
It is found that ESOs are inferior to cash compensation and that the degree of option inferiority depends on employee diversification. In addition, incentive stock options (ISOs) are generally inferior to non‐qualified stock options (NSOs). This relative profitability of the NSO versus ISO increases as market imperfections are added. The authors also find that in general firm hedging of ESOs is suboptimal.
Originality/value
The paper highlights the firm value of employee stock options.
Keywords
Citation
Abudy, M. and Benninga, S. (2011), "Taxation and the value of employee stock options", International Journal of Managerial Finance, Vol. 7 No. 1, pp. 9-37. https://doi.org/10.1108/17439131111108982
Publisher
:Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited