Author: Wendy Heltzer
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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Book Description
This study examines practitioners' perceptions of uses of stock option compensation expense. Specifically, Statement of Financial Accounting Standard (SFAS) No. 123(R) requires firms to report the estimated fair value of stock option compensation as an expense over the employees' required service period. There has been much controversy surrounding this standard: academics, industry leaders and regulators question the reliability of estimating stock option value; consequently, the usefulness of reporting stock option expense in financial statements has been challenged. We provide insights into this debate by finding that financial analysts, on average, support the expensing of stock option expense. Further, approximately two-thirds of analysts use stock option expense in their forecast of short and long term earnings. We also find that analysts' practices regarding stock option expense are not swayed by managements' exclusion of stock option expense in earnings announcements. Together, our findings suggest that financial analysts believe stock option expense contains meaningful information about firm performance.
Author: David Aboody
Publisher:
ISBN:
Category : Accounting
Languages : en
Pages : 0
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Book Description
The objective of this study is to understand the relation between equity market values and stock-based employee compensation expense that is disclosed, but not recognized in determining net income, under Statement of Financial Accounting Standards (SFAS) No. 123. In particular, we predict and find that stock-based compensation expense has a negative relation with share price, consistent with investors viewing it an expense of the firm. This finding calls into question the quality of reported earnings, because without recognition of stock-based compensation expense under SFAS 123, this expense is never included in the net income. It also indicates that stock-based compensation expense is measured with sufficient reliability to be reflected in investor's valuation assessments. Our tests focus on the relation between share price and stock-based compensation expense, after controlling for net income, book value of equity, and expected future earnings growth. Our findings are consistent with our predictions, indicating that investors view stock-based compensation expense as an expense of the firm, after controlling for reported net income, book value of equity, and expected future earnings growth.
Author: Judith S. Ruud
Publisher: DIANE Publishing
ISBN: 1428988599
Category : Business & Economics
Languages : en
Pages : 541
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Book Description
In March 2003, the Financial Accounting Standards Board (FASB) began reconsidering the accounting standard for equity-based compensation. The Board released an exposure draft for a revised standard on Mar. 31, 2004. That revised standard would require firms to recognize the fair value of employee stock options (ESO) as an expense, as was first proposed by FASB more than 10 years ago. This paper assesses whether, under the current accounting standard, firms that grant ESO without recognizing an expense overstate their income. Presents the relevant issues, describes the current standard for ESO, compares the intrinsic value & fair value methods of measure., & weighs the potential economic effects of revising the standard. Ill.
Author: Petro Lisowsky
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
I examine the likelihood of firms adopting the fair value based method of accounting for stock option compensation cost in 2002 and 2003. To examine this issue, I use two matched sample methodologies: (1) a size and book-to-market matching method typically employed in empirical accounting and finance research; and (2) a Propensity Score matching method typically used in the life sciences. I create a profile of firms that elected to expense employee stock option compensation when it was not yet required by Statement on Financial Standards No. 123 (Revised): Share-Based Payment (SFAS 123(R)). I find support for the general hypothesis that increasing switching costs from disclosure to recognition lowers the likelihood for stock option expense adoption in 2002 and 2003. More specifically, the likelihood of expensing stock options decreases when the magnitude of (implied) stock option expense increases and the value of options awarded to the firm's executives increases in relation to their total compensation. I find that the likelihood of expensing stock options increases when the interest coverage ratio increases and when the number of options awarded to the firm's executives increases in relation to the number of stock options awarded to all employees. I also find weak evidence that the likelihood of expensing is highest in the healthcare industry. Although these results hold under both matched sample approaches, the Propensity Score approach helps to prevent misleading statistical inference by reducing the bias inherent in traditional size and book-to-market matched sampling.
Author: Thomas P. Ferguson
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
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Book Description
In 2004 the Financial Accounting Standards Board issued Financial Accounting Statement 123R which, among other things, mandates that firms report the estimated quot;fair valuequot; of employee stock option grants and other forms of equity compensation and apply the expense to their reported earnings. This paper argues that the reasons FASB provides for the necessity of this change - accurate accounting for a value given, comparability among other domestic companies, and comparability internationally - are not only goals that are not met by the change, but that the implementation of FAS 123R is actually a reactionary measure to public outcry and outrage over excessive executive compensation and is designed to reduce executive compensation. Further, even if this surreptitious purpose - which is outside of FASB's scope - is met, it is met in a way that fails to further investors' information needs and fails to offer new comparability efficiencies. While the focus of my inquiry and analysis regarding FAS 123R is on employee stock options, primarily to executives, because options are often granted as just a part of a compensation package they must be addressed in the context of an entire employee compensation package, particularly an equity compensation component. Thus Parts I and II of this paper discuss executive compensation and equity compensation generally. Part I very briefly introduces equity compensation. Part II focuses on the general social and economic issues surrounding executive compensation, particularly equity compensation. Equity compensation is presented in the context of contemporary discourse, discussing bargaining issues, equity effects on manager behavior, necessity to the firm, and public perception. Part III introduces two administrative actions designed to address these issues, FASB's FAS 123R and the SEC's more recent requirement of a Compensation Discussion amp; Analysis. Part IV addresses FASB's main justifications for implementing FAS 123R and finds that those justifications are fallible in that they are either (at best) debatable or (more likely) simply incorrect. Finally, Part V presents the idea that FAS 123R may help to chill outrage, argues that outrage is the driving factor behind FAS 123R, and discusses some of the economic and financial effects of the implementation of FAS 123R.
Author: Haidan Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
This study provides a theoretical analysis and empirical investigation of the valuation implications of employee stock options. I extend the residual income model to incorporate the effects of employee stock options, and then empirically test the model using data related to employee stock options collected from companies' financial statements. I show that the value obtained from the traditional residual income model based on reported earnings must be adjusted for the value of outstanding options and expected stock option expense. The empirical results are consistent with the model, indicating the existence of a cross-sectional negative association between share prices and both outstanding employee stock options and expected stock option expense. In addition, I examine the market's response to the disclosures of stock option information around firms' 10-K filings with the SEC. I find that SFAS 123 footnote disclosures at 10-K filings communicate useful information about employee stock options to investors.
Author: Anne Marie Clem
Publisher:
ISBN:
Category : Corporations
Languages : en
Pages : 188
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Book Description
Author: Lawrence D. Brown
Publisher:
ISBN:
Category :
Languages : en
Pages : 59
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Book Description
We investigate the causes and consequences of changes in option-based compensation for the top five executives around the issuance of SFAS 123R, which requires firms to expense the fair value of their employee stock options (ESOs) on their income statements. We hypothesize that firms with greater tendencies to substitute ESOs for other forms of compensation to report higher earnings pre SFAS 123R cut back more on ESOs. Consistent with our hypotheses, we find that reduction in the proportion of total compensation paid in ESOs increased in the firm's propensity to take advantage of ESOs' favorable accounting as proxied by debt contracting concerns, tendency to achieve earnings benchmarks using ESOs' favorable accounting treatment, corporate governance weakness, and if the firm accelerated vesting of outstanding ESOs in response to SFAS 123R. We show that firms replaced ESOs with restricted stock post SFAS 123R, but the substitution was less than dollar for dollar. We also find that ESO cutbacks around the issuance of SFAS 123R reduced abnormal compensation without harming firms' operating performance.
Author: United States. Congress. House. Committee on Energy and Commerce. Subcommittee on Commerce, Trade, and Consumer Protection
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 150
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Book Description
Author: Johnathan Mun
Publisher: John Wiley & Sons
ISBN: 0471706027
Category : Business & Economics
Languages : en
Pages : 335
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Book Description
A comprehensive guide to understanding the implications andapplications of valuing employee stock options in light of the newFAS 123 requirements Due to the new requirements of the Proposed Statement of FinancialAccounting Standards (FAS 123) released by the Financial AccountingStandards Board (FASB)-namely the fact that employee servicesreceived in exchange for equity instruments be recognized infinancial statements-companies are now scrambling to learn how tovalue and expense employee stock options (ESOs). Based on authorDr. Johnathan Mun's consulting and advisory work with the FASBconsulting projects with several Fortune 500 firms, ValuingEmployee Stock Options provides readers with a comprehensive lookat this complex issue. Filled with valuable information on binomial lattice andclosed-form modeling techniques, Valuing Employee Stock Options canhelp financial professionals make informed decisions whenattempting to ascertain the fair-market value of ESOs under the newrequirements. Johnathan Mun, PhD, MBA, MS, CFC, FRM (San Francisco, CA), is VicePresident of Analytical Services at Decisioneering, Inc., themakers of Crystal Ball analytical software. He is also the authorof Applied Risk Analysis (0-471-47885-7), Real Options Analysis(0-471-25696-X), and Real Options Analysis Course (0-471-43001-3),all of which are published by Wiley.
