The Valuation Implications of Employee Stock Option Accounting for Computer Software Firms

41 Pages Posted: 27 Jun 2000

See all articles by Timothy B. Bell

Timothy B. Bell

KPMG International, LLP - Assurance & Advisory Services Center

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Bruce L. Miller

University of California, Los Angeles (UCLA) - Accounting Area

Shu Yeh

KPMG LLP, Montvale

Date Written: July 2001

Abstract

In this study we compare the ability of alternative accounting methods for employee stock options (ESOs) to reflect firm value using the Ohlson [1995, 1999] and Feltham-Ohlson [1999] valuation models for a sample of 85 computer software firms. The three methods we compare are APB 25, ESO expense recognition based on SFAS 123 disclosures, and asset recognition at grant date based on the Exposure Draft: Accounting for Stock-Based Compensation. We estimate abnormal earnings forecasting and valuation equations for each accounting method. Findings suggest that the method of recognition of an asset at grant date best reflects the market?s valuation of ESO transactions. A robustness test indicates the asset may have a useful life longer than the option vesting period. An additional robustness test indicates that findings are not the result of endogeneity bias.

JEL Classification: M41, M44, G12, G32

Suggested Citation

Bell, Timothy B. and Landsman, Wayne R. and Miller, Bruce Leonard and Yeh, Shu, The Valuation Implications of Employee Stock Option Accounting for Computer Software Firms (July 2001). Available at SSRN: https://ssrn.com/abstract=227888 or http://dx.doi.org/10.2139/ssrn.227888

Timothy B. Bell

KPMG International, LLP - Assurance & Advisory Services Center ( email )

300 Tice Bouldevard
Woodcliff Lake, NJ 87675
201-505-2006 (Phone)

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Bruce Leonard Miller

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
(310) 825-1814 (Phone)

Shu Yeh

KPMG LLP, Montvale ( email )

Montvale Executive Office
Three Chestnut Ridge Road
Montvale, NJ 07645-0435
United States

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