The Impact of Financial and Tax Reporting Incentives on Option Grants to Canadian CEOS
36 Pages Posted: 15 Oct 1998
Date Written: June 1999
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: Suggested Citation