Firm performance, capital structure, and the tax benefits of employee stock options

Kathleen M. Kahle, Kuldeep Shastri

Research output: Contribution to journalArticle

7 Scopus citations


This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Original languageEnglish (US)
Pages (from-to)135-160
Number of pages26
JournalJournal of Financial and Quantitative Analysis
Issue number1
StatePublished - Mar 2005


ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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