Stock Option Expensing: The Role of Corporate Governance

9 Pages Posted: 17 Jul 2008

See all articles by Sanjay Deshmukh

Sanjay Deshmukh

DePaul University - Department of Finance

Keith M. Howe

DePaul University - Department of Finance

Carl F. Luft

DePaul University - Department of Finance

Abstract

The study also found that companies that were the heaviest users of options notably, smaller, high-growth, and less-profitable firms were least likely to expense them. And while this finding adds to the weight of evidence suggesting that companies often make accounting decisions designed to boost reported earnings, the authors also recognize that the possibility that the decision by other companies not to expense may have been a strategy designed primarily to preserve access to capital markets. Analysis of the corporate stock option expensing decision (before the practice became mandatory in 2006) continues to be of interest because it provides insight into the underlying factors affecting not only expense recognition, but the overall corporate decision-making process. Using a sample of 207 companies that volunteered to expense options and more than 1,000 non-expensing firms, the authors found that companies that provide more disclosure and appeared to have a stronger alignment of managerial and shareholder interests were also more likely to expense stock options, finding that the authors view as indirect evidence that voluntary expensing was more likely to occur in companies that practiced effective corporate governance. And consistent with the prediction of efficient market theorists, the study also found no significant market reaction to announcements of these decisions to expense options. The study also found that companies that were the heaviest users of options notably, smaller, high-growth, and less-profitable firms were least likely to expense them. And while this finding adds to the weight of evidence suggesting that companies often make accounting decisions designed to boost reported earnings, the authors also recognize that the possibility that the decision by other companies not to expense may have been a strategy designed primarily to preserve access to capital markets.

JEL Classification: M41, M43, M44, M45, G34, G12, J33

Suggested Citation

Deshmukh, Sanjay and Howe, Keith M. and Luft, Carl F., Stock Option Expensing: The Role of Corporate Governance. Journal of Applied Corporate Finance, Vol. 20, No. 2, pp. 122-128, Spring 2008. Available at SSRN: https://ssrn.com/abstract=1161951 or http://dx.doi.org/10.1111/j.1745-6622.2008.00186.x

Sanjay Deshmukh (Contact Author)

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-8472 (Phone)
312-362-6566 (Fax)

Keith M. Howe

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5126 (Phone)

Carl F. Luft

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

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