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The Impact Of CEO Stock Option Expensing As Per SFAS 123 (R) On Earnings Quality

Year 2014, Volume: 3 Issue: 2, 153 - 170, 01.06.2014

Veronica Paz Syed Zaidi

Abstract

This paper examines the relationship between stock option expensing as per SFAS 123 (R) as a part of CEO compensation and earnings quality. We hypothesize the expensing of CEO stock options as per SFAS 123 (R) positively influences earnings quality. This study contributes to literature by further enhancing our knowledge of CEO compensation and the bonding effect of stock options awarded to CEOs. The ExecuComp database provides the sample for CEO compensation from 2000 to 2009. Estimating earnings quality using multiple regressions, we find empirical support for our hypotheses.

References

  •  Aboody, D., M. E. Barth, and R. Kasznik. 2004. SFAS No. 123 Stock‐Based Compensation Expense and Equity Market Values. The Accounting Review 79 (2):251-275.
  •  Agarwal, N. C. 1981. Determinants of Executive Compensation. In Industrial Relations: Wiley-Blackwell, 36-46. Ashley, A. S., and S. S. M. Yang. 2004. Executive Compensation and Earnings Persistence. Journal of Business Ethics 50 (4):369-382. Attaway, M. C. 1997. A study of the relationship between firm performance and CEO compensation. Doctoral Dissertation. ———. 2000. A study of the relationship between company performance and CEO compensation. In American Business Review, 77-85. Baber, W. R., S. N. Janakiraman, and S. H. Kang. 1996. Investment opportunities and the structure of executive compensation. Journal of Accounting and Economics 21 (3):297-318. Baber, W. R., S.-H. Kang, and K. R. Kumar. 1998. Accounting earnings and executive compensation: The role of earnings persistence. Journal of Accounting and Economics 25 (2):169-193. Baber, W. R., S. H. Kang, and K. R. Kumar. 1999. The explanatory power of earnings levels vs. earnings changes in the context of executive compensation. The Accounting Review 74 (4):459-472.
  •  Benston, G. J. 1985. The Self-Serving Management Hypothesis: Some Evidence. Journal of Accounting & Economics 7 (1-3):67-84.
  •  Boyd, B. K. 1994. Board control and CEO compensation. Strategic Management Journal 15 (5):335-344. Butler, S., and N. Newman. 1989. Agency control mechanisms, effectiveness and decision making in an executive's final year with a firm. Journal of Institutional and Theoritical Economics 145:451-464. Cheng, Q., and D. B. Farber. 2008. Earnings Restatements, Changes in CEO Compensation, and Firm Performance. Accounting Review 83 (5):1217-1250.
  •  Cheng, Q., and T. D. Warfield. 2005. Equity Incentives and Earnings Management. In Accounting Review: American Accounting Association, 441-476.
  • Comiskey, E., and C. W. Mulford. 2000. Guide to Financial Reporting and Analysis New York, New York: John Wiley & Sons.
  • Core, J. E., W. R. Guay, and R. E. Verrecchia. 2003. Price versus non-price performance measures in optimal CEO compensation contracts. Accounting Review 78 (4):957-981.
  • Core, J. E., R. W. Holthausen, and D. F. Larcker. 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51 (3):371-406.
  • Dechow, P. M., and I. D. Dichev. 2002. The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors The Accounting Review 77:35-69.
  •  Durnev, A., and E. H. Kim. 2005. To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation. In The Journal of Finance: Blackwell Publishing for the American Finance Association, 1461-1493. Duru, A., and D. M. Reeb. 2002. International diversification and analysts' forecast accuracy and bias. The Accounting Review 77 (2):415-433.
  •  Erickson, M., M. Hanlon, and E. L. Maydew. 2006. Is There a Link between Executive Equity Incentives and Accounting Fraud? Journal of Accounting Research 44 (1):113-143. Fairfield, P. M., S. Whisenant, and T. L. Yohn. 2003. The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Profitability. Review of Accounting Studies 8 (2-3):221-243. Fama, E. F., and M. C. Jensen. 1983. Agency Problems and Residual Claims. Journal of Law and Economics 26 (2):327-349. FASB. 1995. Statement of Financial Accounting Standards No 123 Accounting for Stock-Based Compensation. Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&bl obkey=id&blobwhere=1175820923312&blobheader=application%2Fpdf .
  •  ———. 2004. Statement of Financial Accounting Standards No 123 (Revised) Share-Based Payment: Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&bl obkey=id&blobwhere=1175823287357&blobheader=application%2Fpdf .
  • Ferri, F., and T. Sandino. 2009. The Impact of Shareholder Activism on Financial
  • Reporting and Compensation: The Case of Employee Stock Options Expensing. In The Accounting Review. United States, Sarasota: American Accounting Association, 433-466.  Finkelstein, S., and D. C. Hambrick. 1989. Chief Executive Compensation: A Study of the Intersection of Markets and Political Proesses. Strategic Management Journal 10 (2):121-134. Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2004. Costs of Equity and Earnings Attributes. The Accounting Review 79 (4):967-1010. ———. 2005. The market pricing of accruals quality. Journal of Accounting and Economics 39 (2):295-327. Gaver, J. J., and K. M. Gaver. 1993. Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and Economics 16 (1-3):125-160.
  •  ———. 1995. Compensation policy and the investment opportunity set. Financial Management 24 (1):19-33. Healy, P. M., and K. G. Palepu. 2001. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 (1-3):405-440. Heltzer, W. 2010. The Impact of SFAS No. 123(R) on Financial Statement Conservatism. Advances in Accounting 26 (2):227-260. Huang, H., Q. Wang, and X. Zhang. 2009. The effect of CEO ownership and shareholder rights on cost of equity capital. Corporate Governance 9 (3):255-270. Jensen, M. C., and W. H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 Jensen, M. C., and K. J. Murphy. 1990. Performance Pay and Top-Management Incentives. The Journal of Political Economy 98 (2):225-264.
  •  Kanagaretnam, K., R. Mathieu, and R. Ramanan. 2009. Stock Option Grants, Current Operating Performance and Deferral of Earnings. In International Journal of Management, 26-32.
  • Kothari, S. P. 2001. Capital markets research in accounting. Journal of Accounting and Economics 31 (1-3):105-231.
  • Kumar, K. R., D. Ghicas, and V. S. Pastena. 1993. Earnings, cash flows and executive compensation: An exploratory analysis. Managerial Finance 19 (2):55
  • Lambert, R. A., and D. F. Larcker. 1987. An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts. Journal of Accounting Research 25:85-125.
  • Lewellen, W., and B. Huntsman. 1970. Managerial Pay and Corporate
  • Performance. In The American Economic Review: American Economic Association, 710-7 Lilling, M. S. 2006. The Link Between CEO Compensation and Firm Performance: Does Simultaneity Matter? Atlantic Economic Journal 34 (1):101-114.
  • Lin, C. C., C. Y. Hua, S. H. Lee, and W. C. Lee. 2011. The policy consequence of expensing stock-based compensation. International Journal of Accounting and Information Management 19 (1):80-93.
  • McNichols, M. F. 2002. DISCUSSION OF The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review 77:61-69.
  • Murphy, K. J., and J. L. Zimmerman. 1986. Financial performance surrounding
  • CEO turnover. Journal of Accounting and Economics 16 (1-3):273-315.  Nourayi, M. M., and F. P. Daroca. 2008. CEO compensation, firm performance and operational characteristics. Managerial Finance 34 (8):562-584.
  •  Rajagopalan, N., and J. E. Prescott. 1990. Determinants of Top Management Compensation: Explaining the Impact of Economic, Behavioral, and Strategic Constructs and the Moderating Effects of Industry. Journal of Management 16 Sanders, W. M. G., and A. C. Mason. 1998. Internationalization and Firm Governance: The Roles of CEO Compensation, Top Team Composition, and Board Structure. The Academy of Management Journal 41 (2):158-178. Sloan, R. G. 1996. Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? In The Accounting Review: American Accounting Association, 289-315.
  • Tosi, H. L., S. Werner, J. P. Katz, and L. R. Gomez-Mejia. 2000. How much does performance matter? A meta-analysis of CEO pay studies. Journal of Management 26 (2):301-339.
  •  Yang, Q. 2006. CEO equity compensation, external monitoring and earnings quality. Young, B. 2011. Employee Stock Option Exercise Behavior and Firms' Claims about Employee Stock Option Expense. Doctoral Dissertation.

Year 2014, Volume: 3 Issue: 2, 153 - 170, 01.06.2014

Veronica Paz Syed Zaidi

Abstract

References

  •  Aboody, D., M. E. Barth, and R. Kasznik. 2004. SFAS No. 123 Stock‐Based Compensation Expense and Equity Market Values. The Accounting Review 79 (2):251-275.
  •  Agarwal, N. C. 1981. Determinants of Executive Compensation. In Industrial Relations: Wiley-Blackwell, 36-46. Ashley, A. S., and S. S. M. Yang. 2004. Executive Compensation and Earnings Persistence. Journal of Business Ethics 50 (4):369-382. Attaway, M. C. 1997. A study of the relationship between firm performance and CEO compensation. Doctoral Dissertation. ———. 2000. A study of the relationship between company performance and CEO compensation. In American Business Review, 77-85. Baber, W. R., S. N. Janakiraman, and S. H. Kang. 1996. Investment opportunities and the structure of executive compensation. Journal of Accounting and Economics 21 (3):297-318. Baber, W. R., S.-H. Kang, and K. R. Kumar. 1998. Accounting earnings and executive compensation: The role of earnings persistence. Journal of Accounting and Economics 25 (2):169-193. Baber, W. R., S. H. Kang, and K. R. Kumar. 1999. The explanatory power of earnings levels vs. earnings changes in the context of executive compensation. The Accounting Review 74 (4):459-472.
  •  Benston, G. J. 1985. The Self-Serving Management Hypothesis: Some Evidence. Journal of Accounting & Economics 7 (1-3):67-84.
  •  Boyd, B. K. 1994. Board control and CEO compensation. Strategic Management Journal 15 (5):335-344. Butler, S., and N. Newman. 1989. Agency control mechanisms, effectiveness and decision making in an executive's final year with a firm. Journal of Institutional and Theoritical Economics 145:451-464. Cheng, Q., and D. B. Farber. 2008. Earnings Restatements, Changes in CEO Compensation, and Firm Performance. Accounting Review 83 (5):1217-1250.
  •  Cheng, Q., and T. D. Warfield. 2005. Equity Incentives and Earnings Management. In Accounting Review: American Accounting Association, 441-476.
  • Comiskey, E., and C. W. Mulford. 2000. Guide to Financial Reporting and Analysis New York, New York: John Wiley & Sons.
  • Core, J. E., W. R. Guay, and R. E. Verrecchia. 2003. Price versus non-price performance measures in optimal CEO compensation contracts. Accounting Review 78 (4):957-981.
  • Core, J. E., R. W. Holthausen, and D. F. Larcker. 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51 (3):371-406.
  • Dechow, P. M., and I. D. Dichev. 2002. The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors The Accounting Review 77:35-69.
  •  Durnev, A., and E. H. Kim. 2005. To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation. In The Journal of Finance: Blackwell Publishing for the American Finance Association, 1461-1493. Duru, A., and D. M. Reeb. 2002. International diversification and analysts' forecast accuracy and bias. The Accounting Review 77 (2):415-433.
  •  Erickson, M., M. Hanlon, and E. L. Maydew. 2006. Is There a Link between Executive Equity Incentives and Accounting Fraud? Journal of Accounting Research 44 (1):113-143. Fairfield, P. M., S. Whisenant, and T. L. Yohn. 2003. The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Profitability. Review of Accounting Studies 8 (2-3):221-243. Fama, E. F., and M. C. Jensen. 1983. Agency Problems and Residual Claims. Journal of Law and Economics 26 (2):327-349. FASB. 1995. Statement of Financial Accounting Standards No 123 Accounting for Stock-Based Compensation. Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&bl obkey=id&blobwhere=1175820923312&blobheader=application%2Fpdf .
  •  ———. 2004. Statement of Financial Accounting Standards No 123 (Revised) Share-Based Payment: Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&bl obkey=id&blobwhere=1175823287357&blobheader=application%2Fpdf .
  • Ferri, F., and T. Sandino. 2009. The Impact of Shareholder Activism on Financial
  • Reporting and Compensation: The Case of Employee Stock Options Expensing. In The Accounting Review. United States, Sarasota: American Accounting Association, 433-466.  Finkelstein, S., and D. C. Hambrick. 1989. Chief Executive Compensation: A Study of the Intersection of Markets and Political Proesses. Strategic Management Journal 10 (2):121-134. Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2004. Costs of Equity and Earnings Attributes. The Accounting Review 79 (4):967-1010. ———. 2005. The market pricing of accruals quality. Journal of Accounting and Economics 39 (2):295-327. Gaver, J. J., and K. M. Gaver. 1993. Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Accounting and Economics 16 (1-3):125-160.
  •  ———. 1995. Compensation policy and the investment opportunity set. Financial Management 24 (1):19-33. Healy, P. M., and K. G. Palepu. 2001. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 (1-3):405-440. Heltzer, W. 2010. The Impact of SFAS No. 123(R) on Financial Statement Conservatism. Advances in Accounting 26 (2):227-260. Huang, H., Q. Wang, and X. Zhang. 2009. The effect of CEO ownership and shareholder rights on cost of equity capital. Corporate Governance 9 (3):255-270. Jensen, M. C., and W. H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 Jensen, M. C., and K. J. Murphy. 1990. Performance Pay and Top-Management Incentives. The Journal of Political Economy 98 (2):225-264.
  •  Kanagaretnam, K., R. Mathieu, and R. Ramanan. 2009. Stock Option Grants, Current Operating Performance and Deferral of Earnings. In International Journal of Management, 26-32.
  • Kothari, S. P. 2001. Capital markets research in accounting. Journal of Accounting and Economics 31 (1-3):105-231.
  • Kumar, K. R., D. Ghicas, and V. S. Pastena. 1993. Earnings, cash flows and executive compensation: An exploratory analysis. Managerial Finance 19 (2):55
  • Lambert, R. A., and D. F. Larcker. 1987. An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts. Journal of Accounting Research 25:85-125.
  • Lewellen, W., and B. Huntsman. 1970. Managerial Pay and Corporate
  • Performance. In The American Economic Review: American Economic Association, 710-7 Lilling, M. S. 2006. The Link Between CEO Compensation and Firm Performance: Does Simultaneity Matter? Atlantic Economic Journal 34 (1):101-114.
  • Lin, C. C., C. Y. Hua, S. H. Lee, and W. C. Lee. 2011. The policy consequence of expensing stock-based compensation. International Journal of Accounting and Information Management 19 (1):80-93.
  • McNichols, M. F. 2002. DISCUSSION OF The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review 77:61-69.
  • Murphy, K. J., and J. L. Zimmerman. 1986. Financial performance surrounding
  • CEO turnover. Journal of Accounting and Economics 16 (1-3):273-315.  Nourayi, M. M., and F. P. Daroca. 2008. CEO compensation, firm performance and operational characteristics. Managerial Finance 34 (8):562-584.
  •  Rajagopalan, N., and J. E. Prescott. 1990. Determinants of Top Management Compensation: Explaining the Impact of Economic, Behavioral, and Strategic Constructs and the Moderating Effects of Industry. Journal of Management 16 Sanders, W. M. G., and A. C. Mason. 1998. Internationalization and Firm Governance: The Roles of CEO Compensation, Top Team Composition, and Board Structure. The Academy of Management Journal 41 (2):158-178. Sloan, R. G. 1996. Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? In The Accounting Review: American Accounting Association, 289-315.
  • Tosi, H. L., S. Werner, J. P. Katz, and L. R. Gomez-Mejia. 2000. How much does performance matter? A meta-analysis of CEO pay studies. Journal of Management 26 (2):301-339.
  •  Yang, Q. 2006. CEO equity compensation, external monitoring and earnings quality. Young, B. 2011. Employee Stock Option Exercise Behavior and Firms' Claims about Employee Stock Option Expense. Doctoral Dissertation.
There are 28 citations in total.

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Journal Section Articles
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Veronica Paz This is me

Syed Zaidi This is me

Publication Date June 1, 2014
Published in Issue Year 2014 Volume: 3 Issue: 2

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APA Paz, V., & Zaidi, S. (2014). The Impact Of CEO Stock Option Expensing As Per SFAS 123 (R) On Earnings Quality. Journal of Business Economics and Finance, 3(2), 153-170.

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