The tax (dis)advantage of a firm issuing options on its own stock

Robert L. McDonald*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

It is common for firms to issue or purchase options on the firm's own stock. Examples include convertible bonds, warrants, call options as employee compensation, and the sale of put options as part of share repurchase programs. This paper shows that option positions with implicit borrowing-such as put sales and call purchases-are tax-disadvantaged relative to the equivalent synthetic option with explicit borrowing. Conversely, option positions with implicit lending-such as warrants-are tax-advantaged. I also show that firms are better off from a tax perspective issuing bifurcated convertible bonds-bonds plus warrants-rather than an otherwise equivalent standard convertible.

Original languageEnglish (US)
Pages (from-to)925-955
Number of pages31
JournalJournal of Public Economics
Volume88
Issue number5
DOIs
StatePublished - Apr 1 2004

Keywords

  • Compensation options
  • Convertible bonds
  • Corporate tax
  • Options
  • Put warrants

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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