The impact of tax incentives on the choice to hold shares acquired from employee stock option exercises

G. Ryan Huston, Thomas J. Smith

Research output: Contribution to journalArticlepeer-review

Abstract

This paper extends prior stock option literature by examining the impact of individual and corporate tax incentives on the decision to hold or sell shares acquired through the exercises of incentive stock options (ISOs) and non-qualified stock options (NQSOs). We focus on factors found in prior literature to be associated with the choice to hold or sell in the context of the type of stock option exercised. Specifically, we find that the positive (negative) relation found in prior literature between the decision to hold shares following exercise and future returns (depth) is associated more with NQSOs than ISOs, consistent with individual tax incentives. Examining corporate tax incentives, we find that corporate tax benefits mitigate insiders' likelihood to hold shares obtained from ISO exercise. Furthermore, we find evidence that firms compensate employees to forgo individual tax benefits associated with holding shares from ISO exercise, and as this compensation increases, insiders are more likely to sell following exercise.

Original languageEnglish
Pages (from-to)67-91
Number of pages25
JournalJournal of the American Taxation Association
Volume34
Issue number2
DOIs
StatePublished - 2012

Keywords

  • Executive compensation
  • Stock options
  • Taxes

Fingerprint Dive into the research topics of 'The impact of tax incentives on the choice to hold shares acquired from employee stock option exercises'. Together they form a unique fingerprint.

Cite this