Analysis of Stock Option Tax Benefits on the Cash Effective Tax Rate

While not explicitly stated, many tax avoidance studies seek to investigate tax avoidance that is the result of firms' intentional choices. Stock option compensation can result in unanticipated reductions to a firm's tax liability because the timing and magnitude of the related tax deduction is determined by employees' exercise of stock options. Because CASHETR includes these unanticipated tax liability reductions, CASHETR mismeasures firms' intentional tax avoidance. I show this mismeasurement is material and can lead to inflated Type I error rates in studies of intentional tax avoidance. I also provide suggestions to aid researchers in mitigating these concerns