The Early Adoption of Stock Option Compensation Expense

53 Pages Posted: 1 Oct 2005 Last revised: 17 Aug 2008

See all articles by Petro Lisowsky

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Date Written: September 29, 2005

Abstract

I examine the likelihood of firms adopting the fair value based method of accounting for stock option compensation cost in 2002 and 2003. To examine this issue, I use two matched sample methodologies: (1) a size and book-to-market matching method typically employed in empirical accounting and finance research; and (2) a Propensity Score matching method typically used in the life sciences. I create a profile of firms that elected to expense employee stock option compensation when it was not yet required by Statement on Financial Standards No. 123 (Revised): Share-Based Payment (SFAS 123(R)). I find support for the general hypothesis that increasing switching costs from disclosure to recognition lowers the likelihood for stock option expense adoption in 2002 and 2003. More specifically, the likelihood of expensing stock options decreases when the magnitude of (implied) stock option expense increases and the value of options awarded to the firm's executives increases in relation to their total compensation. I find that the likelihood of expensing stock options increases when the interest coverage ratio increases and when the number of options awarded to the firm's executives increases in relation to the number of stock options awarded to all employees. I also find weak evidence that the likelihood of expensing is highest in the healthcare industry. Although these results hold under both matched sample approaches, the Propensity Score approach helps to prevent misleading statistical inference by reducing the bias inherent in traditional size and book-to-market matched sampling.

Keywords: Stock Option Compensation Expense, Disclosure, Recognition, FASB123(R), Propensity Scores, Matching

Suggested Citation

Lisowsky, Petro, The Early Adoption of Stock Option Compensation Expense (September 29, 2005). Available at SSRN: https://ssrn.com/abstract=816424 or http://dx.doi.org/10.2139/ssrn.816424

Petro Lisowsky (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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