The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOS

36 Pages Posted: 15 Oct 1998

See all articles by Kenneth J. Klassen

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Amin Mawani

York University - Department of Accounting

Date Written: June 1999

Abstract

This study explores the effects of financial and tax reporting incentives on options granted to chief executive officers in Canada. Extant studies with a similar purpose (Yermack, 1995, and Matsunaga, 1995) explore predominantly non-qualified U.S. option grants that are deductible to the extent the options are in the money at the time of exercise. In contrast, Canadian firms do not get a tax deduction for their stock option grants at any time. In both countries, no expense is recorded for financial reporting purposes. As a result, the financial reporting and tax reporting trade-off is more pronounced in the Canadian setting of this study, compared to the U.S. setting. We measure option granting behaviour as the ratio of the Black-Scholes value of stock option grants to the sum of cash compensation and the value of stock option grants. Using a sample of 806 firm-year observations during the period 1993-1995, we find that observed option grants are significantly correlated with proxies for short-run financial reporting incentives. Unlike previous research, we also find evidence that option granting behaviour is correlated with proxies for tax incentives.

JEL Classification: J33, H25, G38

Suggested Citation

Klassen, Kenneth and Mawani, Amin, The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOS (June 1999). Available at SSRN: https://ssrn.com/abstract=124928 or http://dx.doi.org/10.2139/ssrn.124928

Kenneth Klassen (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Amin Mawani

York University - Department of Accounting ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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