The Unintended Effect of Option Expensing On Human Capital and Brand Capital
46 Pages Posted: 3 Oct 2024
Abstract
We investigate the potential impact of FAS 123R, an exogenous shock of financial standards to the recognition of stock-based compensation, on firms’ human capital and brand capital. After the enactment, firms with high levels of unexpensed stock-based compensation (the treatment firms) made larger cuts in ESOs granted to rank-and-file employees than those granted to CEOs. In addition to a reduction in managerial risk incentive, the treatment firms experienced a significant decline in human capital, as evidenced by lower employee productivity, product quality, and customer satisfaction—factors critical to the development of brand capital. The treatment firms faced lower success ratios of new brands after FAS 123R’s implementation, and the effect was more pronounced when firms were more reliant on human capital. The drops in human and brand capital were accompanied by lower sales growth and gross profit. Overall, our findings suggest an unintended economic consequence of FAS 123R on firms’ human and brand capital.
Keywords: FAS 123R, employee stock options, human capital, brand capital, trademarks, rank and file.
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