Taxing Options: Do Ceos Respond To Favorable Tax Treatment Of Stock Options?

Abstract

CEO stock option compensation increased tremendously during the 1990s. During this period, the spread between the marginal income and capital gains tax rates increased substantially, creating the potential for tax avoidance. Using ExecuComp data from 1992-2000, we estimate CEOs’ responsiveness to changes in these tax rates. Our findings show that an increase in the marginal income and a decrease in the capital gains tax rate create a significant increase in stock option compensation. Furthermore, the impact of the marginal income tax rate is more than twice that of the capital gains tax rate, which contradicts previous studies.