The Unintended Effect of FAS 123R on Firms’ Stock Repurchase Activity

44 Pages Posted: 21 Oct 2014

See all articles by Joanna Golden

Joanna Golden

University of Memphis - School of Accountancy

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Date Written: October 15, 2014

Abstract

We investigate whether or not Financial Accounting Standards (FAS) 123R, which requires recognizing stock-based compensation at fair value, affects stock repurchase activity. Prior research has shown that the dilution effect of dividends on earnings per share (EPS) decreases the value of stock options. Therefore, firms tend to use stock repurchases rather than dividends to return cash to shareholders, which is known as the dividend substitution effect. Also, prior research shows that stock repurchases are used to manage earnings per share. FAS 123R negatively impacts EPS and return on assets as firms record stock-based compensation at fair value. Therefore, we hypothesize and find that FAS 123R is associated with increases in stock repurchases overall and that this effect is greater with increased levels of management stock options. Our study fills a gap in research on the potential effect that FAS 123R might have on how firms decide to return cash to shareholders. Furthermore, we provide evidence on unintended economic consequences of the change in accounting for stock-based compensation.

Keywords: FAS 123R, Stock Repurchases, Stock Options

JEL Classification: M41

Suggested Citation

Golden, Joanna and Kohlbeck, Mark J., The Unintended Effect of FAS 123R on Firms’ Stock Repurchase Activity (October 15, 2014). Available at SSRN: https://ssrn.com/abstract=2512289 or http://dx.doi.org/10.2139/ssrn.2512289

Joanna Golden

University of Memphis - School of Accountancy ( email )

223 Fogelman College Admin. Bldg.
Memphis, TN 38152
United States

Mark J. Kohlbeck (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

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