ABSTRACT
We explore whether an accounting treatment similar to that required under IFRS improves the ability of the stock-based compensation component of deferred tax assets to predict future tax payments, relative to U.S. GAAP. Using hand-collected data for S&P 500 firms, we estimate the deferred tax assets related to employee stock options (ESOs) and restricted stock units (RSUs). We find that the RSU deferred tax asset is negatively related to future cash tax payments, while we fail to find that the ESO deferred tax asset is. However, after reducing the ESO and RSU deferred tax assets by their corresponding estimated impairments, we find that both variables are negatively associated with future tax payments. Additional analysis provides evidence that supports the conjecture that using a revaluation approach to account for stock-based compensation deferred tax assets may be more useful in predicting future tax cash flows, relative to current U.S. GAAP.
JEL Classifications: H25; M41.
Employee Stock Options (ESOPs) and Restricted Stock: Valuation Effects and Consequences
