Alternatives to Traditional Repricing of Executive Stock Options

2011 ◽  
Vol 14 (01) ◽  
pp. 35-80 ◽  
Author(s):  
Jerry T. Yang
Keyword(s):  
Stock Options ◽  
Executive Stock Options ◽  
Agency Model ◽  
Subjective Value ◽  
Dynamic Agency ◽  
Accounting Rules ◽  
Incentive Measure ◽  
Reported Earnings ◽  
The Impact ◽  
Associated Variable

The main purpose of this paper is to examine two commonly used alternatives to traditional repricing (TR) of executive stock options (ESOs) in a dynamic agency model. TR practices have become obsolete since new accounting rules took effect in July 2000. To avoid associated variable accounting charges that cause uncertainty in future reported earnings, companies have tried several TR alternatives as solutions to rescuing underwater options. We justify the occurrence of TR alternatives and quantify the impact of the marking-to-market feature imbedded in the new accounting rules. We also propose an incentive measure which is comparable to the subjective value of ESOs claimed by Ingersoll, J (2006) to rank TR alternatives in terms of agent's incentive.

Executive Stock Options as Mixed Gambles: Revisiting the Behavioral Agency Model

2013 ◽  
Vol 56 (2) ◽  
pp. 451-472 ◽  
Author(s):  
Geoffrey P. Martin ◽  
Luis R. Gomez-Mejia ◽  
Robert M. Wiseman
Keyword(s):  
Stock Options ◽  
Executive Stock Options ◽  
Agency Model ◽  
Behavioral Agency

Disclosure versus Recognition of Stock Option Compensation: Effect on the Credit Decisions of Loan Officers

2008 ◽  
Vol 20 (1) ◽  
pp. 93-113 ◽  
Author(s):  
Chantal Viger ◽  
Réjean Belzile ◽  
Asokan A. Anandarajan
Keyword(s):  
Risk Premium ◽  
Stock Options ◽  
Stock Option ◽  
Bank Loan ◽  
Net Income ◽  
Income Statement ◽  
Loan Officers ◽  
Reported Earnings ◽  
The Cost ◽  
The Impact

We examine if different stock option reporting formats affect bank loan officers' judgments and decisions. Three formats were used: (1) descriptive note of stock options plan only, (2) descriptive note that included a pro forma disclosure showing the impact of expensing the cost of stock options on net income, and (3) recognition of the stock options cost in the income statement. Our results show that loan officers estimated a higher risk rating and a more pessimistic trend rating, were less inclined to grant the loan, and charged a higher risk premium when the stock option expense was recognized in the income statement. Judgments and decisions did not significantly differ for the two methods of footnote disclosure, suggesting that loan officers are functionally fixated on reported earnings. Overall, our results support the FASB's claim that “disclosure is not an adequate substitute for recording.”

scholarly journals The impact of expensing stock options in blockholder-dominated firms. Evidence from Italy

2008 ◽  
Vol 6 (1) ◽  
pp. 107-114 ◽  
Author(s):  
Andrea Melis ◽  
Silvia Carta
Keyword(s):  
Corporate Governance ◽  
Stock Options ◽  
Fair Value ◽  
True Cost ◽  
Accounting Regulation ◽  
Mandatory Adoption ◽  
Ifrs 2 ◽  
Reported Earnings ◽  
The Cost ◽  
The Impact

Accounting for stock options and executive remuneration have been one of the most debated and controversial issues in accounting regulation and corporate governance. The purpose of this study was to explore the impact of the mandatory adoption of IFRS 2 for accounting of stock options in Italian non financial listed companies. This paper has investigated the economic consequences of recording the cost of stock options at its fair value, in terms of its impact on the companies‟ reported earnings, and other key financial performance indicators, such as diluted earnings per share (EPS) and return on assets. The impact of the mandatory recording of the cost of stock options measured at its fair value has generally reduced the reported earnings and other key performance measures moderately. Despite some evidence of creative accounting which was found concerning the elusion of the substance over form principle for the accounting of stock options plans set up before 7th November 2002, accounting regulation has increased the level of disclosure by making companies report the “true” cost of stock options in their Profit or Loss. Based on 2004 stock-based remuneration disclosures of the value of options given to directors and employees, the expensing of options have a material negative impact on nearly 30 per cent of the sample firms‟ reported income and diluted EPS. The mandatory adoption of IFRS 2 seems to have relevant implications for corporate governance as it has reduced the information asymmetry between corporate insiders and outsiders on the “true” cost of stock-based remuneration

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