Congressional Intervention in the Standard-Setting Process: An Analysis of the Stock Option Accounting Reform Act of 2004

2007 ◽  
Vol 21 (1) ◽  
pp. 1-22 ◽  
Author(s):  
David B. Farber ◽  
Marilyn F. Johnson ◽  
Kathy R. Petroni
Keyword(s):  
Stock Options ◽  
Political Action ◽  
Fair Value ◽  
Stock Option ◽  
Financial Accounting Standards Board ◽  
Employee Stock Option ◽  
Setting Process ◽  
Action Committee ◽  
The Cost ◽  
The Impact

We examine H.R. 3574, the Stock Option Accounting Reform Act of 2004 (the Act), which sought to prevent the Financial Accounting Standards Board (FASB) from requiring the expensing of employee stock options at fair value. We find that employee stock option expense under the Act would be approximately 2 percent of what it would be under the FASB's preferred method. We also find that House members supporting the Act were more likely to be Republican, to be conservative, and to have received larger Political Action Committee (PAC) contributions. Finally, the larger the impact of H.R. 3574 on the amount of stock option expense reported by the firm for employees who are not top-five executives, the more contributions the firm's PAC made to House members and to members of the committee that approved the Act. This result suggests that corporate opposition to the mandatory expensing of stock options at fair value is not driven solely by concerns of top-five executives about the cost of recognizing their own options.

Discretion in Financial Reporting: The Voluntary Adoption of Fair Value Accounting for Employee Stock Options

2004 ◽  
Vol 18 (2) ◽  
pp. 97-108 ◽  
Author(s):  
Dahlia Robinson ◽  
Diane Burton
Keyword(s):  
Financial Reporting ◽  
Fair Value ◽  
Stock Option ◽  
Employee Stock Options ◽  
Market Returns ◽  
Employee Stock Option ◽  
Accounting Reports ◽  
Voluntary Adoption ◽  
The Impact ◽  
Is Value

This paper investigates the market reaction to announcements by firms of their decision to adopt the fair value provisions of SFAS No. 123 in accounting for their employee stock option (ESO) expense. Additionally, this paper examines ESO usage and expense of adopting firms and compares the impact of the expense on profitability measures for adopting firms relative to a matched set of control firms. We find a positive and significant abnormal return in the three days around the adoption announcements, suggesting that the decision to expense using the fair value method is value relevant. The positive abnormal announcement returns are mainly attributable to the earlier announcements, consistent with early announcements serving as a credible signal of a commitment to transparency in financial reporting. We find evidence that in the three years prior to the announcement year, adopting firms report significantly higher earnings than control firms yet fail to earn higher market returns, suggesting that adopters stand to benefit the most by improving the market's perception of their accounting reports. We also find that ESO usage, ESO expense, and the impact of ESO expense on profitability are significantly lower for adopters relative to control firms, although the impact of ESO expense is economically significant for 43 percent of the adopters.

scholarly journals DAMPAK STRUKTUR MODAL PADA SENSITIVITAS PENERAPAN KOMPENSASI OPSI SAHAM KARYAWAN TERHADAP KINERJA

2017 ◽  
Vol 14 (1) ◽  
pp. 1
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Stock Options ◽  
Stock Option ◽  
Company Performance ◽  
Employee Stock Option ◽  
Sensitivity Level ◽  
The Impact ◽  
Option Compensation ◽  
Stock Option Compensation

This study aims to test whether the management that receive compensation in the form of stock options having an positive impact on company performance. This study considers the external performance measurement by identifying Cumulative Abnormal Return (CAR). In addition, this study aims to test whether the company's capital structure affects the sensitivity level of employee stock option compensation and firm performance. Capital structure is measured with debt to equity ratio. The result indicates that the proportion of Employee Stock Option Plan (ESOP) influence company performance in accordance with the predictions. This shows that the more stock options offered to employees then came a sense of belonging which resulted in more motivated managers to improve company performance. Furthermore, the higher the market performance of companies that can be achieved, the higher the profit (gain) will be obtained by the recipient of stock options. In addition, this study also shows that the impact of stock option grants at the company's performance declined with the greater capital structure of liability. This shows that the capital structure of liabilities will lower the sensitivity level of employee stock option compensation and firm performance. The higher the company's liabilities would reduce the rights of the owner of the dividends each period in accordance with the ownership of shares held since the company must take into account the interest costs to be paid to the creditor.

The Impact of Tax Incentives on the Choice to Hold Shares Acquired from Employee Stock Option Exercises

2012 ◽  
Vol 34 (2) ◽  
pp. 67-91 ◽  
Author(s):  
G. Ryan Huston ◽  
Thomas J. Smith
Keyword(s):  
Stock Options ◽  
Tax Incentives ◽  
Stock Option ◽  
Corporate Tax ◽  
Negative Relation ◽  
Employee Stock Option ◽  
Prior Literature ◽  
Tax Benefits ◽  
The Impact ◽  
Jel Classifications

ABSTRACT This paper extends prior stock option literature by examining the impact of individual and corporate tax incentives on the decision to hold or sell shares acquired through the exercises of incentive stock options (ISOs) and non-qualified stock options (NQSOs). We focus on factors found in prior literature to be associated with the choice to hold or sell in the context of the type of stock option exercised. Specifically, we find that the positive (negative) relation found in prior literature between the decision to hold shares following exercise and future returns (depth) is associated more with NQSOs than ISOs, consistent with individual tax incentives. Examining corporate tax incentives, we find that corporate tax benefits mitigate insiders' likelihood to hold shares obtained from ISO exercise. Furthermore, we find evidence that firms compensate employees to forgo individual tax benefits associated with holding shares from ISO exercise, and as this compensation increases, insiders are more likely to sell following exercise. JEL Classifications: H24; H25; J33.

scholarly journals Accounting standards for employee stock option disclosure: The current debate

2007 ◽  
Vol 4 (3) ◽  
pp. 87-95
Author(s):  
Geoffrey Poitras
Keyword(s):  
Accounting Standards ◽  
Financial Statements ◽  
Fair Value ◽  
Stock Option ◽  
Financial Accounting ◽  
Current Debate ◽  
Employee Stock Options ◽  
Net Income ◽  
Financial Accounting Standards Board ◽  
Employee Stock Option

The paper examines the implications of recent changes to accounting standards for employee stock based compensation with contingent features. The Dec. 2005 implementation of FAS 123R by the Financial Accounting Standards Board requires the fair value of such expenses to be recorded in net income. The change is now impacting the reported financial statements of firms that have been substantial users of employee stock options. This provides an opportunity to directly assess the actual impact of FAS 123R on such firms. Arguments for and against mandatory expensing are reviewed and an assessment of the contrasting positions provided. Significant limitations of current reporting requirements are identified

scholarly journals DAMPAK STRUKTUR MODAL PADA SENSITIVITAS PENERAPAN KOMPENSASI OPSI SAHAM KARYAWAN TERHADAP KINERJA

2018 ◽  
Vol 14 (1) ◽  
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Stock Options ◽  
Stock Option ◽  
Company Performance ◽  
Employee Stock Option ◽  
Sensitivity Level ◽  
The Impact ◽  
Option Compensation ◽  
Stock Option Compensation

This study aims to test whether the management that receive compensation in the form of stock options having an positive impact on company performance. This study considers the external performance measurement by identifying Cumulative Abnormal Return (CAR). In addition, this study aims to test whether the company's capital structure affects the sensitivity level of employee stock option compensation and firm performance. Capital structure is measured with debt to equity ratio. The result indicates that the proportion of Employee Stock Option Plan (ESOP) influence company performance in accordance with the predictions. This shows that the more stock options offered to employees then came a sense of belonging which resulted in more motivated managers to improve company performance. Furthermore, the higher the market performance of companies that can be achieved, the higher the profit (gain) will be obtained by the recipient of stock options. In addition, this study also shows that the impact of stock option grants at the company's performance declined with the greater capital structure of liability. This shows that the capital structure of liabilities will lower the sensitivity level of employee stock option compensation and firm performance. The higher the company's liabilities would reduce the rights of the owner of the dividends each period in accordance with the ownership of shares held since the company must take into account the interest costs to be paid to the creditor.

scholarly journals VALUATION OF EMPLOYEE RELOAD OPTIONS USING UTILITY MAXIMIZATION APPROACH

2005 ◽  
Vol 08 (05) ◽  
pp. 659-674 ◽  
Author(s):  
KA WO LAU ◽  
YUE KUEN KWOK
Keyword(s):  
Risk Aversion ◽  
Stock Options ◽  
Utility Maximization ◽  
Stock Option ◽  
Employee Stock Options ◽  
Employee Stock Option ◽  
General Utility ◽  
Black Scholes ◽  
The Difference ◽  
The Cost

The reload provision in an employee stock option is an option enhancement that allows the employee to pay the strike upon exercising the stock option using his owned stocks and to receive new "reload" stock options. The usual Black–Scholes risk neutral valuation approach may not be appropriate to be adopted as the pricing vehicle for employee stock options, due to the non-transferability of the ownership of the options and the restriction on short selling of the firm's stocks as hedging strategy. In this paper, we present a general utility maximization framework to price non-tradeable employee stock options with reload provision. The risk aversion of the employee enters into the pricing model through the choice of the utility function. We examine how the value of the reload option to the employee is affected by the number of reloads outstanding, the risk aversion level and personal wealth. In particular, we explore how the reload provision may lower the difference between the cost of granting the option and the private option value and improve the compensation incentive of the option award.

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

scholarly journals An Alternative Method Of Accounting For Stock Options

2014 ◽  
Vol 30 (2) ◽  
pp. 439
Author(s):  
Thomas Smith ◽  
Adrian Valencia ◽  
Ara Volkan
Keyword(s):  
Stock Options ◽  
Intrinsic Value ◽  
Market Price ◽  
Fair Value ◽  
Financial Accounting ◽  
Employee Stock Options ◽  
Financial Accounting Standards Board ◽  
Exercise Price ◽  
The Difference ◽  
The Impact

<p>Currently, the grant date fair value of employee stock options is expensed over the vesting period. Our study introduces a new valuation approach for stock options and examines the impact of this change on earning per share (EPS) for a sample of firms over the period 2002-2011. The new valuation approach provides data useful to the Financial Accounting Standards Board (FASB) as it determines whether to revise the current option accounting rules. Under the proposed approach, options are valued at their intrinsic value on the grant date (i.e., the opportunity cost or the economic promise associated with the difference between the exercise price of the option and the market price of the stock at each measurement date) and further revalued each reporting date until the options are exercised.</p>

scholarly journals The Value-Relevance Of Stock-Based Employee Compensation Disclosures

2011 ◽  
Vol 17 (2) ◽  
Author(s):  
Lynn Rees ◽  
David M. Stott
Keyword(s):  
Firm Value ◽  
Stock Options ◽  
Value Relevance ◽  
Positive Association ◽  
Fair Value ◽  
Stock Option ◽  
Business Community ◽  
Employee Stock Options ◽  
Employee Compensation ◽  
Employee Stock Option

<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">This study employs pro-forma company footnote disclosures to assess the value-relevance of employee stock option compensation expense using the fair value method as stipulated by Statement of Financial Accounting Standard No. 123.<span style="mso-spacerun: yes;">&nbsp; </span>The study is motivated by the controversy surrounding the issue of accounting for employee stock options and the countervailing effects of issuing stock options on firm value.<span style="mso-spacerun: yes;">&nbsp; </span>Although accounting regulators and the business community agree that employee stock options have value and therefore, are a form of compensation, critics of the FASB&rsquo;s proposed fair value method of accounting for employee stock options argue that measuring the compensation expense using contemporary models will result in unreliable and meaningless measures.<span style="mso-spacerun: yes;">&nbsp; </span>Moreover, the expected future benefits from granting stock options suggest that this form of employee compensation is not a typical expense.<span style="mso-spacerun: yes;">&nbsp; </span>We find a significant association between the disclosed compensation expense using the fair value method and firm value that is in the opposite direction from other income statement expenses.<span style="mso-spacerun: yes;">&nbsp; </span>This result implies that the disclosed employee stock option expense is a value-relevant measure and the incentives derived from employee stock option plans provide value-increasing benefits to the firm.<span style="mso-spacerun: yes;">&nbsp; </span>In addition, we find the positive association between the employee stock option expense and firm value is greater for firms with more growth opportunities.</span></span></span></p>

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