Taxation and the Early Exercise of Call Options

Alpert, Karen

doi:10.1111/j.1468-5957.2010.02183.x

Cited by 8 publications

(12 citation statements)

References 19 publications

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“…While these studies do not focus on option values explicitly, they capture the value of flexibility. Niemann and Sureth (2013) identify the paradoxical effects on real investment timing under profit and capital gains taxation, whereas Alpert (2010) investigates the timing of financial call options, demonstrating that taxes can be decisive for early exercise.…”

Section: Prior Literaturementioning

confidence: 99%

“…We model cash flow uncertainty using a binomial stochastic process to approximate the random walk (Alpert 2010;Schneider and Sureth 2010;Niemann and Sureth 2013). As the structure of the economic forces in the continuous-time models is very complex (Alvarez and Koskela 2008;Gries, Prior, and Sureth 2012), this simple stochastic process enables us to conduct an experiment to determine whether the predicted (accelerating) tax reactions can be observed.…”

Section: Theoretical Modelmentioning

confidence: 99%

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Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

2014

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ABSTRACT:It is well-known that taxes affect risky investment decisions. Analytical studies indicate that tax rate increases (decreases) can foster (hinder) investment if there is flexibility, in particular when an exit option is available. We design an experiment based on an analytical model with binomial random walk and entry and exit flexibility. Contrasting the underlying model, we find accelerated investment, which is often considered as an increased willingness to invest, on tax rate increases to be independent of the existence of an exit option. However, we observe this investor reaction only for a tax increase, not for a tax decrease. This behavior is driven possibly by tax salience and the mechanisms known from the theory of irreversible choice under uncertainty. Our empirical evidence suggests that the at-first-sight unexpected tax reform effects are more common than is predicted by the theoretical literature. Policy makers should therefore carefully consider the behavioral aspects when anticipating taxpayer reactions. JEL Classification: H25, H21, C91

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Section: Prior Literaturementioning

confidence: 99%

Section: Theoretical Modelmentioning

confidence: 99%

Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

2014

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“…Poteshman and Serbin investigate two tax strategies that might in principle explain their results and conclude that in practice, they are unlikely to do so. Alpert (2010) provides a rigorous theoretical analysis of the effects of tax on the early exercise decision, together with empirical evidence using UK data 1 . Alpert’s empirical study suggests that many early exercise decisions that appear irrational in a no‐tax setting may be rational once taxes are taken into account.…”

Section: Introductionmentioning

confidence: 99%

“… Abstract Alpert (2010) develops a detailed analysis of the conditions for rational early exercise of call options in the presence of taxes. Using Alpert’s analysis as the theoretical framework, we examine the early exercise of call options in Australia over the period from 1 January 2001 to 30 June 2008.…”

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confidence: 99%

Rational early exercise of call options: Australian evidence

Ing

Brown

2010

Accounting & Finance

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Alpert (2010) develops a detailed analysis of the conditions for rational early exercise of call options in the presence of taxes. Using Alpert's analysis as the theoretical framework, we examine the early exercise of call options in Australia over the period from 1 January 2001 to 30 June 2008. We find that exercises occurring on the last cum-dividend trading day can be fully explained by non-tax reasons, whilst taxation is a potential explanation for a large proportion of the early exercises that occur at other times.

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“…Robinson and Sansing (2008) analytically investigate how tax advantages and financial reporting disadvantages of immediate expensing affect investment decisions and find countervailing effects on the decision to investment in internally developed intangible assets. Alpert (2010) analyzes the impact of personal income taxation on call options and shows that tax can explain a large portion of early exercise events that have been classified as "irrational" in previous studies. To summarize, while the mentioned literature analyzes investment incentive effects of taxes in particular settings, our major contribution that extends the existing work is that we study the interplay of taxes and real options in an agency setting.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Corporate Taxes and Flexibility on Entrepreneurial Decisions with Moral Hazard and Simultaneous Firm and Personal Level Taxation

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort.

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Taxation and the Early Exercise of Call Options

Cited by 8 publications

References 19 publications

Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

Can Tax Rate Increases Foster Investment Under Entry and Exit Flexibility? - Insights from an Economic Experiment

Rational early exercise of call options: Australian evidence

The Impact of Corporate Taxes and Flexibility on Entrepreneurial Decisions with Moral Hazard and Simultaneous Firm and Personal Level Taxation

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