The Valuation Relevance of Deferred Incentive Compensation: Tests of the Incentive, Financing and Tax Saving Hypotheses
Posted: 13 Jul 1998
Date Written: January 1996
This study posits that disclosures regarding employee stock options and employee stock ownership plans jointly with earnings and book value reveal information about a firm's incentive structure and its ability to retain valuable employees. These plans may provide a firm incentive, financing, and tax benefits. This study supports the incentive hypothesis over the financing hypothesis by providing evidence that these plans are positively valuation relevant incrementally to operating cash flows. The incentive hypothesis is also supported over the tax hypothesis since the plans found to be valuation relevant can be shown to be sub-optimal tax saving mechanisms. Additionally, the valuation relevance of these plans vary according to a firm's type and size.
JEL Classification: M4
Suggested Citation: Suggested Citation