Expensing Stock Options: The Role of Publicity

Abstract:     
In this paper we offer explanations for why firms began voluntarily adopting the expensing provisions of FAS 123 in the second half of 2002. First, we find that firms with greater publicity exposure are more likely to voluntarily expense stock options, controlling for other factors such as the magnitude of the stock option expense. This publicity incentive also explains the timing of the decisions, the summer of 2002, immediately following the accounting scandals of Enron and WorldCom. Second, we find that valuation benefits from expensing stock options, proxied by market's reaction to the proposition by the FASB to undertake a project requiring firms' to expense stock options, are positively associated with the decision to expense. Third, we do not find evidence that stronger corporate governance is associated with the likelihood to expense options. Finally, we find some evidence suggesting that, compared to control firms, expensing firms reduce the number of options granted in 2002 and have started to make more changes to their compensation plans as reflected in the most recent proxy statements.

Keywords: stock options expensing, publicity

JEL Classifications: M41, M44, G12, G34, J33

Working Paper Series