Espresso, Inc.: Analyzing the Impact of Employee Stock Options

2000 ◽  
Vol 15 (3) ◽  
pp. 513-534
Author(s):  
Susan E. Moyer ◽  
Susan G. Weihrich
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Financial Statements ◽  
Stock Option ◽  
Employee Stock Options ◽  
Flow Effects ◽  
The Impact ◽  
Subsequent Sale

This case explores the effects of stock option awards on companies and their employees. We examine how options likely affect employee wealth by considering tax and cash-flow effects of the grant and exercise of the option and of the subsequent sale of stock. We also examine how the company reports stockoption transactions in its financial statements and footnotes and how the options affect the company's tax return. These issues are investigated for both incentive stock options and nonqualified stock options. In addition, the case's setting presents the challenges of balancing employee and corporate objectives when structuring this increasingly common form of compensation.

Accounting for Employee Stock Options

2004 ◽  
Vol 18 (2) ◽  
pp. 135-156 ◽  
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.

SFAS No. 123 Disclosures and Discounted Cash Flow Valuation

2000 ◽  
Vol 14 (2) ◽  
pp. 169-189 ◽  
Author(s):  
Leonard C. Soffer
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Stock Option ◽  
Financial Statement ◽  
Employee Stock Options ◽  
Financial Statement Analysis ◽  
Discounted Cash Flow ◽  
Employee Stock Option ◽  
Valuation Technique ◽  
Discounted Cash Flow Valuation

One of the cornerstones of financial statement analysis is the discounted cash flow valuation. Despite the broad use of this valuation technique, and the economic importance of employee stock options to firm values, there is little guidance on how employee stock options should be incorporated in a valuation. This paper provides a comprehensive approach to doing so, including consideration of the income tax implications of option exercises, the simultaneity of equity and option valuation, and the use of the disclosures that were mandated recently by Statement of Financial Accounting Standards No. 123. The paper provides a comprehensive example using Microsoft's fiscal 1997 financial statements and employee stock option disclosure. This paper should be of interest to academics and practitioners involved in corporate valuation and financial statement analysis.

EDGAR Extraction System: An Automated Approach to Analyze Employee Stock Option Disclosures

2006 ◽  
Vol 20 (2) ◽  
pp. 119-142 ◽  
Author(s):  
Gerry H. Grant ◽  
Sumali J. Conlon
Keyword(s):  
Stock Options ◽  
Financial Statements ◽  
Relevant Information ◽  
Stock Option ◽  
Financial Statement ◽  
Automated System ◽  
Extraction System ◽  
Specific Information ◽  
Employee Stock Options ◽  
Employee Stock Option

Past alternative accounting choices and new accounting standards for stock options have hindered analysts' ability to compare corporate financial statements. Financial analysts need specific information about stock options in order to accurately assess the financial position of companies. Finding this information is often a tedious task. The SEC's EDGAR database is the richest source of financial statement information on the Web. However, the information is stored in text or HTML files making it difficult to search and extract data. Information Extraction (IE), the process of finding and extracting useful information in unstructured text, can effectively help users find vital financial information. This paper examines the development and use of the EDGAR Extraction System (EES), a customized, automated system that extracts relevant information about employee stock options from financial statement disclosure notes on the EDGAR database.

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.

Accrual management and the decision to sell or hold shares acquired from the exercise of employee stock options

2020 ◽  
pp. 0000-0000
Author(s):  
Thomas Smith ◽  
G. Ryan Huston ◽  
Richard M. Morton
Keyword(s):  
Stock Option ◽  
Employee Stock Options ◽  
Short Term ◽  
Post Exercise ◽  
Employee Stock Option ◽  
Holding Period ◽  
Before And After ◽  
Accrual Management ◽  
The Impact

This study extends the employee stock option literature by examining the impact of accrual management, before and after stock option exercise, on the timing of sales of shares acquired at exercise. We find evidence that accrual management prior to exercise is positively associated with the decision to quickly sell shares after exercise, facilitating a short-term exercise-and-sell strategy. Alternatively, we find that, among executives initially choosing to hold at exercise, tax incentives appear to drive both post-exercise accrual management and the timing of sale transactions. Specifically, our results suggest that executives use income-increasing accruals during the holding period to bolster their stock option gains sand then sell immediately after satisfying the minimum (twelve month) holding period for long-term capital gain treatment. These results provide context for prior research that found evidence of earnings management leading up to option exercise on the expectation of an immediate sale.

Impact of Employee Stock Options on Cash Flow

2004 ◽  
Vol 60 (2) ◽  
pp. 39-46 ◽  
Author(s):  
Conrad S. Ciccotello ◽  
C. Terry Grant ◽  
Gerry H. Grant
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Employee Stock Options

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

2010 ◽  
Vol 13 (03) ◽  
pp. 449-468 ◽  
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.

The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives

2017 ◽  
Vol 20 (02) ◽  
pp. 1750012 ◽  
Author(s):  
Steven Hegemann ◽  
Iuliana Ismailescu
Keyword(s):  
Stock Options ◽  
Stock Option ◽  
Stock Repurchases ◽  
Share Repurchases ◽  
Employee Stock Options ◽  
Empirical Examination ◽  
Negative Relation ◽  
Management Incentives ◽  
Reported Income

This study examines management’s response to the change in accounting for stock option-based compensation imposed by SFAS No. 123R, whose implementation is expected to reduce reported income. To cope with this impact, management may be motivated to decrease the use of stock options as part of compensating employees and engage in stock repurchases in an attempt to increase the value of outstanding employee stock options. Our findings demonstrate a significant negative relation between stock options granted and shares repurchased in the aftermath of SFAS No. 123R, particularly for the S&P 500 firms known for their heavy use of employee stock options. Furthermore, evidence of a contemporaneous increase in repurchases and leverage in the post SFAS 123R period may suggest that some of the buybacks may have been funded with debt. Our findings are robust to the inclusion of traditional determinants of share repurchases.

scholarly journals EXECUTIVE STOCK OPTION PLANS: UJI PENGELOLAAN LABA SELAMA VESTING PERIOD

2018 ◽  
Vol 14 (4) ◽  
pp. 478-500
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Stock Options ◽  
Stock Exchange ◽  
Early Stage ◽  
Financial Statements ◽  
Stock Option ◽  
Share Price ◽  
Executive Stock Option ◽  
Grant Program ◽  
Final Sample ◽  
A Company

This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final

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