SEE “DOCUMENT 1” FOR CRITERIA 2 “DOCUMENT 2” FOR CRITERIA 4. You


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SEE “DOCUMENT 1” FOR CRITERIA 2 “DOCUMENT 2” FOR CRITERIA 4. You are to write a 2 to 4 page paper following APA rules for the title page, citations and appropriate references within the body of the paper. The minimum number of content pages is 2 and the maximum is 4 for the two issues noted in “a” and “b” below. Locate the following research article using the OCLS and EBSCOhost referenced below: Graham, J. R., Lang, M. H., & Shackelford, D. A. (2004). Employee Stock Options, Corporate Taxes, and Debt Policy. Journal of Finance, 59(4), 1585-1618. doi:10.1111/j.1540-6261.2004.00673.x Your paper is to address the following:What is a nonqualified stock option, how and why is it used to compensate executive management? You may use other sources, however, you must reference and cite them. Also, remember to reference and cite the textbook. The author’s research indicates that by using stock options, corporations that trade on NASDAQ can reduce their estimated median marginal tax rate from 31% to 5%. Using information from the article, explain how these corporations use stock options to reduce their marginal tax rates. In a page following your reference page, use the Accounting Standards Codification to locate the section which discusses accounting principles relevant to stock compensation. Next access the overview and background subsection. Copy subsection 05-3 and paste to the page. Also, properly cite this code section. Go towww.irs.govand search for Publication 525. Use the Index located at the back of the publication to find the section on “stock options, nonstatutory.” Next, select the “exercise or transfer” of option. Copy the section titled “Transfer in Arm’s Length Transaction” to the page. Include a citation of the source. Document 1.pdf THE JOURNAL OF FINANCE • VOL. LIX, NO. 4 • AUGUST 2004 Employee Stock Options, Corporate Taxes, and Debt Policy JOHN R. GRAHAM, MARK H. LANG, and DOUGLAS A. SHACKELFORD∗ ABSTRACT We find that employee stock option deductions lead to large aggregate tax savings for Nasdaq 100 and S&P 100 firms and also affect corporate marginal tax rates. For Nasdaq firms, including the effect of options reduces the estimated median marginal tax rate from 31% to 5%. For S&P firms, in contrast, option deductions do not affect marginal tax rates to a large degree. Our evidence suggests that option deductions are important nondebt tax shields and that option deductions substitute for interest deductions in corporate capital structure decisions, explaining in part why some firms use so little debt. THIS PAPER EXPLORES the corporate tax implications of compensating employees with nonqualified stock options. Corporations deduct the difference between current market and strike prices when an employee exercises a nonqualified stock option. For option-intensive companies with rising stock prices, this deduction can be very large. We focus on the effects of options on the year 2000 marginal tax rates (MTRs) for Nasdaq 100 and S&P 100 firms and the implications for debt policy.1 Understanding the tax implications of options is increasingly important because the proportion of compensation paid in stock options has soared in recent years. A perspective on the magnitude of options compensation and its increase over time can be gained from papers like the one by Desai (2002), who reports that in 2000 the top five officers of the 150 largest U.S. firms received options with grant values exceeding $16 billion, which he estimates is a tenfold increase over the decade. He estimates that proceeds from option exercises averaged 29% of operating cash f lows in 2000, up from 10% in 1996. In addition, ∗ We appreciate excellent research assistance from Courtney Edwards, Allison Evans, Laura Knudson, and Julia Wu and insightful comments from an anonymous referee, Alon Brav, John Core, Richard Frankel, David Guenther, John Hand, Mike Lemmon, Ed Maydew, Hamid Mehran, Vikas Mehrotra, Dan

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