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This research aims to determine how tax rates influence the selection between incentive stock options and nonqualified stock options by executives.

The Choice of Incentive Stock Options vs. Nonqualified Options: A Marginal Tax Rate Perspective.

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This research aims to determine how tax rates influence the selection between incentive stock options and nonqualified stock options by executives.
Examined 337 option grants from 187 firms during the early 1980s.
Analyzed choices between ISOs and nonqualified options considering tax implications and holding periods.
Tested the joint tax minimization proposition against executive tax burdens.
ISOs or mixtures of ISOs and nonqualified options were favored by most firms despite corporate tax disadvantages.
Findings support joint tax minimization mainly when executives have long holding periods for their stock options.
Alternative reasoning suggests options may be selected primarily to reduce executive tax liabilities.

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Randomized trial examines tax implications of stock options in firms, suggesting strategic decision-making around tax liabilities.

Austin et al. (1998) studied this question.

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