Discretionary Reporting of Stock Options by IPO Firms

The revision of SFAS No. 123 (SFAS No. 123R, FASB 2004) requires companies to recognize the fair value of employee stock options. In addition, nonpublic companies will no longer be permitted to assume stock price volatility of zero when calculating the fair value of their stock options. This study finds that the zero volatility assumption allowed under the original version of SFAS No. 123 (FASB 1995) resulted in an average estimated fair value of options that was $1.06 (40 percent) less than the fair value calculated using a peer group volatility estimate for firms undergoing an initial public offering (IPO). However, IPO firms that estimated their volatility underreported option values by an even larger magnitude than the group using the zero volatility assumption. Perhaps these firms reported a downward-biased estimate of volatility to inhibit analysts from computing option values using more reasonable volatility estimates. Contrary to the findings for public companies, we find that a large percentage of sample firms issued in-the-money options prior to going public. Following the IPO, only a small portion of firms issued in-the-money options. The concerns regarding recognizing option expense may be less important than the benefits of granting in-the-money options for IPO firms.

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Diluted Earnings Per Share Overstatement Bias: Including Unrecognized Employee Compensation In Proceeds From Assumed Exercise Of Employee Stock Options Under The Treasury Stock Method

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v29i6.8204 ◽

2013 ◽

Vol 29 (6) ◽

pp. 1657

Author(s):

David T. Doran

Keyword(s):

Financial Reporting ◽

Stock Price ◽

Stock Options ◽

Fair Value ◽

Stock Option ◽

Employee Stock Options ◽

Employee Compensation ◽

Earnings Per Share ◽

Service Period ◽

Free Environment

Generally accepted accounting principles (GAAP) require firms to recognize compensation expense under the fair value method in the case of employee stock options. Straight line amortization of the options grant date fair value must be recognized as expense over the service period which decreases the earnings per share numerator. For diluted earnings per share (EPS), GAAP requires using the treasury stock method, where proceeds from assumed stock option exercise is used to purchase treasury shares at the average for the period price. Exercise proceeds include the exercise price plus unrecognized future employee compensation. For profitable firms, exercise is assumed if dilutive - more shares are assumed issued than are reacquired for the treasury which increases the diluted EPS denominator. These requirements are consistent across US GAAP and International Financial Reporting Standards. This paper tests whether including unrecognized employee compensation in proceeds from the assumed exercise of employee stock options under the treasury stock method is appropriate. A simple multi period model that assumes a risk free environment with complete certainty is applied. This study contributes to the literature by demonstrating that future unrecognized employee compensation should not be included in proceeds from the assumed exercise of stock options under the treasury stock method. Doing so consistently causes diluted EPS overstatement, and in certain instances causes assumed exercise of in the money options to be antidilutive, which results in complete exclusion from the diluted EPS calculation. This research extends the employee stock option work of Doran (2005 and 2008) that found: 1) Compensation expense recognized over the employee service period should equal the periodic annuity amount that provides the options grant date fair value, and 2) Treasury shares should be assumed purchased at the higher end of period stock price.

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Employee Stock Options And Diluted Earnings Per Share

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v3i11.2828 ◽

2011 ◽

Vol 3 (11) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Price ◽

Stock Options ◽

Intrinsic Value ◽

Market Price ◽

Fair Value ◽

Employee Stock Options ◽

Research Support ◽

Earnings Per Share ◽

Free Environment ◽

Period Model

At the time of this writing, SFAS No.123 (1995) prescribes GAAP in accounting for employee stock options. It allows firms to choose either the intrinsic or fair value method in determining the amount of compensation expense recognized for employee stock options. The choice of method affects the numerator of the earnings per share (EPS) calculation. The FASB recently issued a revised SFAS No. 123 (2004) which will require uniform application of the fair value method. GAAP also requires that the denominator for the diluted EPS calculation be increased for incremental shares under the treasury stock method. SFAS 128 requires the treasury stock method be applied where the proceeds from the assumed exercise of options are used to acquire shares of the firm’s outstanding stock at the average market price for the period. Previous to SFAS No. 128, APB Opinion No. 15 required that the higher of average or period ending stock price be used in determining the number of shares reacquired with the proceeds from the assumed exercise of stock options. This paper develops a simple one period model that assumes a risk free environment with complete certainty conditions in testing the accuracy of EPS calculated under GAAP using the fair value method vs. the intrinsic value method. The results indicate that EPS reported under the intrinsic value method are overstated, and further indicate that a combination of both the fair value method and the treasury stock method is needed in calculating diluted EPS. This fair value and treasury stock method combination is shown to not “double count” the stock option’s impact upon EPS. The results also indicate a slight misstatement of diluted EPS under the fair value method when applying the treasury stock method requirements of SFAS No. 128. Correct EPS results when shares are assumed reacquired for the treasury at the higher year ending price, consistent with superseded APB 15. However, the diluted EPS misstatement is so slight that the FASB’s rationale for always requiring the use of average period price seems likely to be justified. The findings of this research support the requirements of SFAS No. 123 (revised 2004) and SFAS No. 128.

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EMPLOYEE EQUITY INCENTIVES AND VENTURE CAPITALIST INVOLVEMENT: EXAMINING THE EFFECTS ON IPO PERFORMANCE

Journal of Developmental Entrepreneurship ◽

10.1142/s1084946708001058 ◽

2008 ◽

Vol 13 (04) ◽

pp. 409-423 ◽

Cited By ~ 2

Author(s):

JAMES W. WESTERMAN ◽

SCOTT W. GEIGER ◽

LINDA A. CYR

Keyword(s):

Initial Public Offering ◽

Stock Price ◽

Stock Options ◽

Venture Capitalist ◽

Venture Capitalists ◽

Ipo Performance ◽

Equity Incentives ◽

Price Performance ◽

Public Offering ◽

Positive Effect

We examine the effects of venture capitalist involvement and equity incentives for all employees on the performance of initial public offering firms. Data was collected from 402 IPO firms, representing 242 non-VC backed and 160 VC backed firms. Results indicate venture capitalists positively influence the likelihood the portfolio firm will offer equity incentives to all employees. Consistent with the agency theory argument that monitoring and incentives can behave as complements to one another, the results suggest venture capitalist backing and incentive stock options for all employees operate in concert to have a positive effect on stock price performance three years after the initial public offering.

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Pengaruh Reputasi Underwriter, Umur Perusahaan, dan Persentase Penawaran Saham 53 kepada Publik terhadap Underpricing

Jurnal ULTIMA Accounting ◽

10.31937/akuntansi.v8i1.577 ◽

2016 ◽

Vol 8 (1) ◽

pp. 53-74

Author(s):

Maria Jeanne ◽

Chermian Eforis

Keyword(s):

Initial Public Offering ◽

Stock Price ◽

Stock Exchange ◽

Secondary Data ◽

Secondary Market ◽

Financial Statement ◽

Data Set ◽

Multiple Regression Method ◽

Underwriter Reputation ◽

Public Offering

The objective of this research is to obtain empirical evidence about the effect of underwriter reputation, company age, and the percentage of share’s offering to public toward underpricing. Underpricing is a phenomenon in which the current stock price initial public offering (IPO) was lower than the closing price of shares in the secondary market during the first day. Sample in this research was selected by using purposive sampling method and the secondary data used in this research was analyzed by using multiple regression method. The samples in this research were 72 companies conducting initial public offering (IPO) at the Indonesian Stock Exchange in the period January 2010 - December 2014; perform initial offering of shares; suffered underpricing; has a complete data set forth in the company's prospectus, IDX monthly statistics, financial statement and stock price site (e-bursa); and use Rupiah currency. Results of this research were (1) underwriter reputation significantly effect on underpricing; (2) company age do not effect on underpricing; and (3) the percentage of share’s offering to public do not effect on undepricing. Keywords: company age, the percentage of share’s offering to public, underpricing, underwriter reputation.

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The Stock Price Reaction to Repricing Employee Stock Options

SSRN Electronic Journal ◽

10.2139/ssrn.292097 ◽

2001 ◽

Cited By ~ 1

Author(s):

John R.M. Hand ◽

Barbara M. Grein ◽

Kenneth J. Klassen

Keyword(s):

Stock Price ◽

Stock Options ◽

Employee Stock Options ◽

Price Reaction ◽

Stock Price Reaction

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Accounting for Employee Stock Options

Accounting Horizons ◽

10.2308/acch.2004.18.2.135 ◽

2004 ◽

Vol 18 (2) ◽

pp. 135-156 ◽

Cited By ~ 18

Author(s):

Michael Kirschenheiter ◽

Rohit Mathur ◽

Jacob K. Thomas

Keyword(s):

Stock Options ◽

Financial Statements ◽

Cash Flows ◽

Stock Option ◽

Share Price ◽

Employee Stock Options ◽

Deferred Taxes ◽

Recommended Treatment ◽

Option Values ◽

The Common

Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options-as-equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to current equityholders by the pretax value of projected option grants. We show that these distortions can be avoided simply by accounting for options as liabilities at grant and thereafter recognizing changes in option values (similar to the accounting for stock appreciation rights). Our analysis of stock option accounting leads to two, more general implications: (1) all securities other than common shares should be treated as liabilities, thereby simplifying the equity versus liability distinction, and (2) these liabilities should be recorded at fair values, thereby obviating the need to consider earnings dilution.

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Peran Growth Opportunities, Free Cash Flow, dan Relative Issue Size dalam Reaksi Pasar terhadap Pengumuman Right Issue

The Winners ◽

10.21512/tw.v8i1.742 ◽

2007 ◽

Vol 8 (1) ◽

pp. 24

Author(s):

Synthia Atas Sari ◽

Hartiwi Prabowo

Keyword(s):

Initial Public Offering ◽

Stock Price ◽

Stock Exchange ◽

Free Cash Flow ◽

Final Conclusion ◽

Growth Opportunities ◽

Normal Period ◽

Stock Price Reaction ◽

Test Market ◽

Public Offering

Right issue is when a firm announces its plan to publicly offer additional shares of common stock after Initial Public Offering (IPO). The aim of this research are to test market stock price and examine the role of growth opportunities in stock price reaction to right issue announcement. Sample was taking from companies which been listed in Jakarta Stock Exchange and publish right issue from 1998 to 2005. To measure growth opportunities, the companies were divided into 2 groups, growth and mature. This classification using Tobin’s q proxy method (market-book value ratio). The research have final conclusion, that is at right issue announcement in Jakarta Stock Exchange, market give positive reaction and statistically significant, and so in normal period.

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The Impact of IFRS 2 "Share-Based Payment" on Malaysian Companies

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091510002025 ◽

2010 ◽

Vol 13 (03) ◽

pp. 449-468 ◽

Cited By ~ 7

Author(s):

Ruhaya Atan ◽

Nur Syuhada Jasni ◽

Yousef Shahwan

Keyword(s):

Stock Options ◽

Negative Relationship ◽

Fair Value ◽

Employee Stock Options ◽

Accounting Standard ◽

Corporate Scandals ◽

Black Scholes ◽

Compensation Plan ◽

The Impact ◽

International Accounting Standard

In the wake of corporate scandals and excessive stock options compensation, International Accounting Standard Board (IASB) has introduced a new accounting standard, IIFRS 2 Share-based Payments. The scope of the standard extends beyond payments to employees, but for the purpose of this study, the focus is only on 'employee stock options'. IIFRS 2 requires a fair value of stock options records calculated on grant date, and recognized as compensation expenses over vesting periods. Prior to the introduction of IIFRS 2, stock options were not recognized and were only disclosed in the notes to the accounts. In Malaysia, the standard is mandatory for all companies listed on or after January 1, 2006. This study assumes the requirement existed in 2003. This study examines the impact of stock options expenses from 2003 to 2005, on the top 100 Malaysian companies. The three year observations show at least 24% of the sample exceeds the 5% materiality threshold on diluted EPS. The sectors that are impacted the most are the Trade/Service and Finance sectors. From the multiple-regression test, this study finds that fair value of stock options have a negative relationship with dividend yields (input of the Black-Scholes Merton (BSM) Model). Most companies in the sample are found to pay dividends and grant stock options at the same time. Therefore, this study suggests that companies need to restructure their compensation plan thus balancing the stock options granted and dividends paid in the future.

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The Effects of Employee Stock Options on Credit Ratings

The Accounting Review ◽

10.2308/accr.2008.83.5.1273 ◽

2008 ◽

Vol 83 (5) ◽

pp. 1273-1314 ◽

Cited By ~ 22

Author(s):

Yen-Jung Lee

Keyword(s):

Stock Options ◽

Credit Rating ◽

Credit Ratings ◽

Fair Value ◽

Cash Flows ◽

Share Repurchases ◽

Credit Rating Agencies ◽

Employee Stock Options ◽

Rating Agencies ◽

Unfavorable Effect

ABSTRACT: This paper examines whether outstanding employee stock options (ESOs), which represent the firm’s contractual obligation to deliver shares upon ESO exercise, affect firms’ credit ratings. I hypothesize that outstanding ESOs play two information roles—(1) suggesting equity infusion, and (2) predicting share repurchases—that help credit-rating agencies evaluate the issuing company’s debt service ability. Consistent with these hypothesized roles, results indicate that the present values of expected cash proceeds and tax benefits from ESO exercise have favorable effects on credit ratings. In contrast, the present value of the expected cost of ESO-related share repurchases has an unfavorable effect on credit ratings and this unfavorable effect is more pronounced for firms with a greater tendency to repurchase shares. The after-tax fair value of outstanding ESOs, which summarizes the effects of the above three ESO-related cash flows, is negatively associated with credit ratings. Taken together, these findings are consistent with credit-rating agencies incorporating the information conveyed by outstanding ESOs regarding potential equity infusion and ESO-related repurchases in their credit risk assessments and assigning lower credit ratings to firms with greater values of outstanding ESOs.

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A Note On Accounting For Employee Stock Options When Reporting Diluted Earnings Per Share Under The Treasury Stock Method

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v6i10.2477 ◽

2011 ◽

Vol 6 (10) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Options ◽

A Priori ◽

Market Price ◽

Accounting Standards ◽

Fair Value ◽

Financial Accounting ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Earnings Per Share ◽

Free Environment

Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options.  Current GAAP also requires that for purposes of calculating diluted earnings per share (EPS), the treasury stock method be applied where the assumed proceeds from exercise of the optioned shares is used to purchase shares of the firm’s stock at its average market price of the earnings period.  These incremental shares increase the denominator for purposes of calculating diluted EPS.  These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).  This study extends the work of Doran (2005) and Doran (2008).  These previous studies found that applying the treasury stock method where shares are assumed purchased at the average for the period price (instead of end of year price) understates the number of incremental shares (the denominator), which overstates diluted EPS.  However, these previous works assumed that no shares were actually purchased for the treasury during the earnings period.  The FASB indicates one reason that the average for the period price is appropriate is because if treasury shares purchases were to occur, “the shares would be purchased at various prices, not at the price at the end of the period.”  This study tests the notion that the average for the period price is appropriate under circumstances where the firm actually purchases shares for the treasury at its average market price during the earnings period.  This paper employs a simple one period model that assumes a risk free environment with complete certainty.  The model allows comparison of computed EPS with an a priori known, correct amount.  Consistent with Doran (2005) and Doran (2008), the results here again indicate that assuming purchase of treasury shares at their average market price of the earnings period understates the EPS denominator which results in EPS overstatement.  Correct diluted EPS is derived when the shares assumed purchased under the treasury stock method are acquired at the higher period ending market price.

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