Stock Compensation Expense, Cash Flows and Inflated Valuations

28 Pages Posted: 1 Jan 2020 Last revised: 12 May 2020

See all articles by Sanjeev Bhojraj

Sanjeev Bhojraj

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: December 12, 2019

Abstract

This paper reviews the statement of cash flow implications of stock compensation expense and the effect it can have on valuations. The paper suggests that treating stock compensation as a non-cash item in the statement of cash flows can be misleading from internal decision making and external valuation perspectives. This is important given the increasing role of non-GAAP cash flow disclosures in financial reporting as well as their use internally by managers. It quantifies the potential size of the problem and suggests potential solutions including treating stock compensation expense as an operating cash outflow and a financing cash inflow and/or adding further descriptive disclosures to the financial statements. Finally, the paper also highlights a similar issue that occurs with the cash flow implications of finance leases.

Keywords: stock compensation, non-GAAP disclosures, Free cash flow, overvaluation

JEL Classification: M41, G02,G14,G11

Suggested Citation

Bhojraj, Sanjeev, Stock Compensation Expense, Cash Flows and Inflated Valuations (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3503684 or http://dx.doi.org/10.2139/ssrn.3503684

Sanjeev Bhojraj (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Accounting
Ithaca, NY 14853
United States
607-255-4069 (Phone)
607-254-4590 (Fax)

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