The Differential Value Relevance of S&P's Core Earnings Versus GAAP Earnings: The Role of Stock Option Expense

27 Pages Posted: 27 Feb 2013

See all articles by Matthew M. Wieland

Matthew M. Wieland

Miami University of Ohio - Department of Accountancy

Mark Dawkins

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Michael T. Dugan

University of Alabama

Date Written: January/February 2013

Abstract

In 2002, Standard & Poor's (S&P) introduced Core Earnings as a proprietary, uniform earnings metric, with the goal of improving financial reporting. The distinguishing feature of Core Earnings is its consistent treatment of seven adjustments to GAAP earnings for which there is no consensus adjustment by managers and analysts. We use stock price and return data to assess whether investors perceive Core Earnings to be more value relevant than GAAP earnings. The implementation of FASB 123R changed the calculation of GAAP and Core Earnings. This change allows us to assess the role of stock option expense in the valuation of earnings numbers by partitioning the sample into pre‐ and post‐FASB 123R periods and creating consistent measures of GAAP and Core Earnings. Our price results indicate that Core Earnings is more value relevant than GAAP earnings in the pre‐period after controlling for stock option expense, and in the post‐FASB 123R periods. The price results provide empirical evidence consistent with S&P's expectation that a uniformly calculated earnings measure is a more consistent and useful indicator of current performance and future earnings.

Keywords: GAAP earnings, core earnings, value‐relevance, information content, employee stock option expense, ESO expense, implied stock option expense, ISO expense, stock option expense, goodwill impairment

Suggested Citation

Wieland, Matthew M. and Dawkins, Mark and Dugan, Michael T., The Differential Value Relevance of S&P's Core Earnings Versus GAAP Earnings: The Role of Stock Option Expense (January/February 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 1-2, pp. 55-81, 2013, Available at SSRN: https://ssrn.com/abstract=2225669 or http://dx.doi.org/10.1111/jbfa.12013

Matthew M. Wieland (Contact Author)

Miami University of Ohio - Department of Accountancy ( email )

310 Laws Hall
Oxford, OH 45056-1675
United States

Mark Dawkins

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3632 (Phone)

Michael T. Dugan

University of Alabama ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2902 (Phone)
205-348-8453 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
1,178
PlumX Metrics