The tax treatment of employee stock options : generous to a fault

In the 2000 budgets, both the federal and Ontario governments introduced changes to the tax treatment of employee stock options for the explicit purpose of making their tax treatment in Canada similar to or more favourable than that in the United States. The federal budget added a deferral, similar to that currently applicable to options granted by Canadian-controlled private corporations, for up to $100,000 per year of public company stock options. The Ontario budget introduced an exemption from tax for employees involved in research and development on the first $100,000 per year of employee benefits arising on the exercise of qualified stock options or on eligible capital gains arising from the sale of shares acquired by the exercise of eligible stock options. These proposals reflect the apparent acceptance by the two governments that there is a “brain drain” from Canada to the United States of knowledge workers in the “new” economy and that reductions in Canadian taxes should stem this drain. In the author’s view, the tax treatment of employee stock options, even without these changes, is overly generous. Both the federal and provincial proposals ignore the fact that most employee stock options are taxed more favourably in Canada than in the United States in any event. In particular, most employee stock option benefits in Canada are taxed at capital gains tax rates, whereas in the United States most are taxed at full rates. While the US Internal Revenue Code does provide capital gains tax treatment for certain employee stock option benefits, a number of preconditions must be met. Most important, the shares acquired pursuant to the options must be held for a minimum of one year after the option is exercised. In addition, there are monetary limits on the amount of options that qualify for capital gains treatment. In Canada, there are generally no holding period requirements or monetary limits that apply in order for the option holder to benefit from capital gains tax rates. Empirical evidence indicates that the vast majority of employees in the United States exercise their options and immediately sell the shares acquired. These “cashless exercises” do not benefit from capital gains treatment in the United States, whereas similar cashless exercises in Canada generally do. This empirical evidence suggests not only that the 2000 budget proposals are unwarranted, but also that the existing treatment of employee stock options in Canada is already more generous than that in the United States. This article begins with a theoretical “benchmark” for the taxation of employee stock options. The author suggests that employee stock options should be treated in the same manner as other income from employment. In theory, the value of the benefit should be included in income when the option is granted or vests. However, owing to the practical difficulty of valuing employee stock options, the theoretical benchmark proposed is that the value of the benefit (the difference between the fair market value of the shares acquired and the strike price under the option) be taxed when the shares are acquired, and the employer be entitled to a corresponding deduction. The employee stock option rules in Canada and the United States are then compared and contrasted with each other and the benchmark treatment. The article then examines the arguments that have been made for favourable treatment of employee stock options. Included in this critique is a review of the recent empirical work on the Canadian brain drain. Empirical studies suggest that the brain drain—if it exists at all—is small and that, despite what many newspapers and right-wing think-tanks would have us believe, lower taxes in the United States are not the cause. One study, concluding that taxes do have an effect on migration, suggests that even if Canada adopted a tax system identical to that in the United States, the brain drain would be reduced by a mere 10 percent. Indeed, even if Canada eliminated income tax altogether, it would not stop the brain drain. If governments here want to spend money in order to stem the brain drain, they should focus on other areas. For example, Canada produces fewer university graduates in the fields of mathematics, sciences, and engineering than any other G7 country except Italy. The short supply of university graduates in these fields, the apparent loss of top-calibre academics to US
universities, and the consequent lower levels of university research in these areas (an important spawning ground for new ideas in the “new” knowledge-based economy) suggest that Canada may be better served by devoting more resources to its university institutions, particularly in post-graduate programs, rather than continuing the current trend of budget cuts that universities have endured and may further endure if taxes are reduced.
As far as employee stock options are concerned, if Canada does want to look to the United States for guidance on tax reform (which it seems to do with increasing frequency of late), it should adopt the US rules applicable to nonstatutory options, which are close to the proposed benchmark treatment. In the absence of preferential tax treatment, employee stock options would still be included in compensation packages provided that there were sound business reasons for their use. No persuasive evidence has been put forward that the use of stock options, in the absence of tax incentives, is suboptimal. Indeed, the US experience suggests quite the opposite.

Information signalling of common stock repurchase announcements: Australian evidence

Stock repurchases (or share buy-backs) have become increasingly popular among Australian companies. One of the main aims of announcing a stock repurchase by a listed company is signalling the market that its shares are currently underpriced. When market reacts to the signal, price of the shares is expected to increase immediately after the announcement. While there are several ways of repurchasing shares, 'on-market buy-backs' is the most popular method of stock repurchases in Australia. Australian listed companies have announced more than two hundred on-market share buy-backs over the past three years. The aim of this paper is to examine the information signalling effects of these on-market buy-back announcements. If the signal is considered positively (negatively) by the market, the price of the repurchasing company's shares should increase (decrease) immediately after the announcement. If there is no information content in the announcement, the price will remain the same. In this study, signalling effect of share buy-back announcements was examined using most recent Australian data. The total population of on-market buy-back announcements during the period from January 1, 2000 to March 10, 2003 was included. The abnormal market return over the short-run (announcement day and 9 trading days centred on the announcement date) was computed using the All Ordinaries Accumulation Index as the reference portfolio. The daily Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) during the event period were computed. The results strongly support the information-signalling hypothesis of share buy..backs. Australian market generally considers announcement of on~market share repurchases as signalling of insider information that shares are currently underpriced.

Price exhaustion and number preference : time and price confluence in Australian stock prices

Confluence occurs when different trading filters generate signals that point to the same directional move. Using regression analysis, this paper investigates confluence trading signals associated with number preference and price exhaustion, for a sample of Australian stocks. The results show that certain price levels tend to act as psychological barriers, and that price exhaustion signals are a real phenomenon in the Australian stock market. It is shown also that confluence exists in the Australian stock market. Importantly, confluence is associated with price retracements that are of economic and statistical significance, offering profitable trading opportunities. The results suggest that Australian stocks do not follow a random walk.

On the extent of speculative activity in the Indian stock market during badla and post-badla period

The authors test the existence of speculative activity in the Indian stock market during badla and post-badla period. They further investigate whether speculative activity migrated to single stocks futures market after banning of badla system. In both the tests it is found that there is no evidence of strong speculative activity in the Indian market. The research raises some questions on the regulators decision of banning badla system and sheds some light on the future decisions with respect to single stock futures market.

Simultaneous volatility transmissions and spillover effects: U.S. and Hong Kong stock and futures markets

Contemporaneous transmission effects across volatilities of the Hong Kong Stock and Index futures markets and futures volume of trade are tested by employing a structural systems approach. Competing measures of volatility spillover, constructed from the overnight U.S. S&P500 index futures, are tested and found to impact on the Hong Kong asset return volatility and volume of trade patterns. The examples utilize intra-day 15-min sampled data from this medium-sized Asia Pacific equity and derivative exchange. Both the intra- and inter-day patterns in the Hong Kong market are allowed for in the estimation process.

A review of the guidelines for ABC stock control

The paper summarises the methods promulgated in the literature for the design and maintenance of an effective inventory control system. Surprisingly, when it comes to putting theory into practice, the directives are often contradictory or opaque and their logic is inconsistent. Several published cases are dissected to try and rectify this parlous situation. In fact, the exercise soon reveals the heart of the problem. The classic EOQ model ignores the part played at the supplier’s end by efficient and responsive warehouse and transport operations. These activities depend greatly upon good advanced resource planning, which in turn is able to benefit from regular, cyclic, stock replenishment procedures.

Taking stock of school music education in Victoria: the lessons of history in the present context of the national review

The National Review of School Music Education represents a unique opportunity to identify and find solutions to some of the very long-standing problems in Australian school music education, particularly in the government school sector. This paper is based on the premise that there are lessons to be learned from the over 150 years of music education in Victorian government schools and that it is only by considering the current status, provision and quality of school music from an historical perspective and resolving emergent issues that effective and worthwhile music education can be provided for future generations of Australian students. Developments in school music education since the 1850s are discussed and analysed in terms of the present-day issues to be addressed by National Review and a number of mutually-dependent factors are identified as combining to produce almost cyclic patterns of ebb and flow in the status, provision and quality of music education in Victoria. The paper identifies several such factors requiring immediate attention including the inadequacy of generalist primary teacher education in music, what has effectively become the extra-curricular status of music in many government schools, and the more recent problems associated with 'the over-crowded curriculum' and the emergence of The Arts as the generic Key Learning Area in which Music now finds itself as just one of many arts disciplines. The paper concludes by making three key recommendations for consideration in the context of the current National Review of School Music Education.

Time-varying hedge ratios: an application to the Indian stock futures market

This paper investigates time-varying optimal hedge ratios in individual stock futures markets in India. The analysis employs data on individual stock futures from an unexplored but highly traded (both in terms of volume and quantity) emerging market. The hedge ratios derived in this study incorporate mean reversion in volatility, which is an important extension of the bivariate BEKK-GARCH model of Engle and Kroner. This extension generates improved optimal hedge ratios over the traditional BEKK-GARCH model and static error correction type alternatives.

Time varying hedge ratios : an application to the Indian stock futures market

This paper investigates time-varying optimal hedge ratios in individual stock futures markets in India. The analysis employs data on individual stock futures from an unexplored but highly traded (both in terms of volume and quantity) emerging market. The hedge ratios derived in this study incorporate mean reversion in volatility, which is an important extension of the bivariate BEKK-GARCH model of Engle and Kroner. This extension generates improved optimal hedge ratios over the traditional BEKK-GARCH model and static error correction type alternatives.

Mean reversion in stock prices: new evidence from panel unit root tests

Purpose – There are several studies that investigate evidence for mean reversion in stock prices. However, there is no consensus as to whether stock prices are mean reverting or random walk (unit root) processes. The goal of this paper is to re-examine mean reversion in stock prices.
Design/methodology/approach – The authors use five different panel unit root tests, namely the Im, Pesaran and Shin t-bar test statistic, the Levin and Lin test, the Im, Lee, and Tieslau Lagrangian multiplier test statistic, the seemingly unrelated regression test, and the multivariate augmented Dickey Fuller test advocated by Taylor and Sarno.
Findings – The main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis.
Research limitations/implications – One issue not considered by this study is the role of structural breaks. It may be the case that the efficient market hypothesis is contingent on structural breaks in stock prices. Future studies should model structural breaks.
Practical implications – The findings have implications for econometric modelling, in particular forecasting.
Originality/value – This paper adds to the scarce literature on the mean reverting property of stock prices based on panel data; thus, it should be useful for researchers.

How much physical activity is enough to prevent unhealthy weight gain? Outcome of the IASO 1st Stock Conference and consensus statement

A consensus meeting was held in Bangkok, 21–23 May 2002, where experts and young scientists in the field of physical activity, energy expenditure and bodyweight regulation discussed the different aspects of physical activity in relation to the emerging problem of obesity worldwide. The following consensus statement was accepted unanimously.
‘The current physical activity guideline for adults of 30 minutes of moderate
intensity activity daily, preferably all days of the week, is of importance for
limiting health risks for a number of chronic diseases including coronary heart disease and diabetes. However for preventing weight gain or regain this guideline is likely to be insufficient for many individuals in the current environment. There is compelling evidence that prevention of weight regain in formerly obese individuals requires 60–90 minutes of moderate intensity activity or lesser amounts of vigorous intensity activity. Although definitive data are lacking, it seems likely that moderate intensity activity of approximately 45 to 60 minutes per day, or 1.7 PAL (Physical Activity Level) is required to prevent the transition to overweight or obesity. For children, even more activity time is recommended. A good approach for many individuals to obtain the recommended level of physical activity is to reduce sedentary behaviour by incorporating more incidental and leisure-time activity into the daily routine. Political action is imperative
to effect physical and social environmental changes to enable and encourage physical activity. Settings in which these environmental changes can be implemented include the urban and transportation infrastructure, schools, and workplaces.’