Stock Options Expensing: An Examination of Agency and Institutional Theory Explanations

9 Pages Posted: 25 Jan 2014

See all articles by Pamela M. Brandes

Pamela M. Brandes

Syracuse University

Michael Hadani

Saint Mary's College of California - School of Economics & Business Administration

Maria L. Goranova

University of Wisconsin - Milwaukee

Date Written: May 24, 2006

Abstract

As the debate over appropriate compensation disclosure continues, some firms have volunteered to recognize stock option costs within their income statements. On the one hand, stock option expensing can significantly enhance the legitimacy of the organization and restore shareholders' confidence in corporate governance practices. On the other hand, expensing stock options could decrease firm earnings, leading to unfavorable comparisons to non-expensing firms. Our logit analysis of 402 S&P firms lends partial support to agency theory explanations for stock option expensing; these results depend on the costs associated with expensing. We find stronger support for the institutional theory perspective that mimetic pressures significantly increase the likelihood that firms will expense stock options, independent of the cost. Our findings have important governance implications, suggesting a more complex model of compensation disclosure in which social pressures dominate voluntary compensation disclosure decisions.

Keywords: Executive compensation, Corporate governance, Institutional theory, Ownership

JEL Classification: G3

Suggested Citation

Brandes, Pamela M. and Hadani, Michael and Goranova, Maria L., Stock Options Expensing: An Examination of Agency and Institutional Theory Explanations (May 24, 2006). Journal of Business Research, Vol. 59, No. 5, 2006, Available at SSRN: https://ssrn.com/abstract=2384676

Pamela M. Brandes (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

Michael Hadani

Saint Mary's College of California - School of Economics & Business Administration ( email )

United States

Maria L. Goranova

University of Wisconsin - Milwaukee ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

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