ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Stock Option Exercise and Tax Avoidance

  • Ko, Yunsung College of Business, Hankuk University of Foreign Studies

Asian Tax Journal Vol. 16 No. 2 (2015), pp. 45-83

Abstract

This study examines the firms' tax avoidance associated with the stock option. We expect the exercise of stock options is closely related to the firms' tax avoidance because book-tax conformity is relatively high in Korea. Firms with exercised stock options are likely to have greater increase in the taxable income as well as book income compared to the firms without exercised stock options. Thus, we anticipate that the firms with exercised stock options have more incentives to avoid taxes than the firms without exercised options. Specifically, firms with high exercise ratio are likely to have greater increase in taxable income and thus avoid taxes more aggressively compared to the firms with lower exercise ratio. In addition, we assume that firms engage in tax avoidance activity after the exercise, not prior to the exercise because they tend to focus on the strategy of lowering their increased tax burden after the exercise, while they focus on the strategy of increasing book income to boost their stock prices prior to the exercise. We analyze firms that grant stock options from 2000 to 2009 to investigate the association between the stock option exercise and tax avoidance. We find following empirical results. First, tax avoidance are significantly greater for firms with exercising stock options than firms without exercising options. Second, tax avoidance is significantly greater for firms with high ratio of the option exercise than the firms with low exercise ratio. Third, firms engage in tax avoidance activity in the period when the option is exercised, not in the prior period of the exercise. This study makes a contribution to the literature by addressing stock option exercise from the tax perspective. We expect that our findings will have new implications for firms and financial information users who are interested in stock option under the current circumstances where lack wide range of research on the option exercise.

Keywords

  • Stock Option
  • Exercise
  • Tax Avoidance
  • Tax Cost

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