Call Options and Accruals Quality

51 Pages Posted: 19 Aug 2004

See all articles by Jennifer Francis

Jennifer Francis

Duke University

Per Olsson

Duke University

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: August 2004

Abstract

We investigate whether greater use of call options in compensation and financing arrangements is associated with financial reporting choices that affect accruals quality, which previous research has shown to be a priced measure of information risk. Consistent with prior research documenting an association between the use of call options in compensation arrangements (in the form of employee stock options or ESOs) and increased returns and/or income volatility, we find that ESOs are also associated with poorer accruals quality, which has been shown to be related to increased returns volatility. However, call options used in financing arrangements (in the form of convertible debt and convertible preferred stock) provide no post-issuance incentives to worsen accruals quality, and may encourage the opposite behavior. We predict and find that the use of these instruments is associated with better accruals quality.

Keywords: Employee stock options, accruals quality, risk incentives

JEL Classification: M41, M43, J33

Suggested Citation

Francis, Jennifer and Olsson, Per Mikael and Schipper, Katherine, Call Options and Accruals Quality (August 2004). Available at SSRN: https://ssrn.com/abstract=577881 or http://dx.doi.org/10.2139/ssrn.577881

Jennifer Francis (Contact Author)

Duke University ( email )

Fuqua School of Business
Durham, NC 27708
United States
919-660-7817 (Phone)
919-648-2818 (Fax)

Per Mikael Olsson

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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