Stock Price Reaction and Value Relevance of Recognition Versus Disclosure: The Case of Stock-Based Compensation

Posted: 26 Mar 2003

See all articles by Hassan Espahbodi

Hassan Espahbodi

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Pouran Espahbodi

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Zabihollah Rezaee

University of Memphis - School of Accountancy

Hassan Tehranian

Boston College - Department of Finance

Abstract

This study examines the equity price reaction to the pronouncements related to accounting for stock-based compensation (i.e., stock options and similar equity instruments) and assesses the value relevance of recognition versus disclosure in financial reporting. We document that firms exhibit significant abnormal returns around the issuance of the Exposure Drafts proposing to require recognition of stock-based compensation costs, and also around the event reversing that decision to require disclosure only (while encouraging recognition). We also document that the abnormal returns are most pronounced for high-tech, high-growth, and start-up firms. Our results are consistent with the contracting theory, and show that disclosure is not a substitute for recognition.

Keywords: capital market, accounting standard, stock option, security price reaction

JEL Classification: G14, M41, M44, C39, J33

Suggested Citation

Espahbodi, Hassan and Espahbodi, Pouran and Rezaee, Zabihollah and Tehranian, Hassan, Stock Price Reaction and Value Relevance of Recognition Versus Disclosure: The Case of Stock-Based Compensation. Journal of Accounting and Economics, Vol. 33, No. 3, pp. 343-373, August 2002. Available at SSRN: https://ssrn.com/abstract=332063

Hassan Espahbodi

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

201 West University Drive
Edinburg, TX 78539
United States

Pouran Espahbodi

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

201 West University Drive
Edinburg, TX 78539
United States

Zabihollah Rezaee

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

Hassan Tehranian (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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