Changes in Option‐Based Compensation Around the Issuance of SFAS 123r

43 Pages Posted: 14 Dec 2011

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Yen‐Jung Lee

affiliation not provided to SSRN

Date Written: November/December 2011

Abstract

We investigate the extent to which employee stock option (ESO) cutbacks around issuance of SFAS 123R are explained by eliminating the favorable accounting treatment available to firms prior to SFAS 123R and the economic consequences of such ESO cutbacks. We find a reduction in the grant day fair value of ESOs to all employees, which is an increasing function of the accounting benefits the firm derived from ESOs’ favorable accounting treatment prior to SFAS 123R. The removal of these accounting benefits explains 20% (45%) of ESO cutbacks around the issuance of SFAS 123R for our sample median (mean) firm. We do not find that firms cutting back more on the use of ESOs experienced a greater decrease in firm performance. Rather, a dollar increase in ESOs is associated with higher future productivity and higher future firm value in the post‐SFAS 123R period. Collectively, our evidence suggests that ESOs’ favorable accounting treatment prior to SFAS 123R provided firms with incentives to make compensation decisions that minimized accounting expense but did not maximize firm value. We show that firms were more likely to replace ESOs with restricted stock and long‐term incentive plans post‐SFAS 123R but the substitution was far less than dollar for dollar.

Keywords: stock options, executive compensation, SFAS 123R, corporate governance, restricted stock

Suggested Citation

Brown, Lawrence D. and Lee, Yen‐Jung, Changes in Option‐Based Compensation Around the Issuance of SFAS 123r (November/December 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 9‐10, pp. 1053-1095, 2011. Available at SSRN: https://ssrn.com/abstract=1972096 or http://dx.doi.org/10.1111/j.1468-5957.2011.02247.x

Lawrence D. Brown

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Yen‐Jung Lee

affiliation not provided to SSRN

No Address Available

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