Disqualifying Dispositions of Incentive Stock Options: Tax Benefits versus Financial Reporting Costs

Abstract

Scholes and Wolfson [1992] provide a general model in which firms trade off tax benefits with nontax costs in their organizational form, investment, financing, and compensation choices. This study documents a trade-off between tax benefits and financial reporting costs that supports the descriptive validity of their model. Specifically, we provide evidence consistent with the view that some firms forego net tax benefits by not undertaking disqualifying dispositions of incentive stock options (ISOs) in order to avoid reductions in reported net income.' This evidence on