Abstract

At first blush, the deferral of employee income recognition associated with equity compensation appears to provide a tax advantage in a rising market but an offsetting disadvantage in a declining market. Merton Miller and Myron Scholes argued, however, that this apparent symmetry is misleading and that employees can hedge to ensure tax efficiency despite market uncertainty. This article demonstrates that the effect of employee hedging is fairly small, but that a combination of factors, including capital loss limitations, the possibility of employee-favorable ex post adjustments to equity compensation arrangements, and employee hedging, do cause compensatory stock grants and nonqualified options to be tax advantaged on an expected value basis.

Size: 312 KB
Est. download time @ 28.8K: 11 seconds

Adobe Acrobat Reader v3.01 or greater is required to view this paper.
To obtain a free copy, click the button below

David I. Walker Contact Information

diwalker@bu.edu
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
USA
(617) 353-3174

Presentation and Publication Information:

To be announced.

Social Science Research Network

Click here to close this window.