The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition and Management Disavowals

Posted: 30 Mar 2006

See all articles by James R. Frederickson

James R. Frederickson

Melbourne Business School

Frank D. Hodge

University of Washington - Michael G. Foster School of Business

Jamie H. Pratt

Indiana University - Kelley School of Business - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Abstract

In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.

Keywords: Disavowal, mandated disclosures, stock options, voluntary disclosures, experience

JEL Classification: D80, M41, M45, C91, J33

Suggested Citation

Frederickson, James R. and Hodge, Frank Douglas and Pratt, James H., The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition and Management Disavowals. Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=892601

James R. Frederickson

Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053
Australia

Frank Douglas Hodge (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Paccar Hall 540, Box 353200
Seattle, WA 98195-3200
United States
206-616-8598 (Phone)
206-685-9392 (Fax)

James H. Pratt

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2657 (Phone)
812-855-8679 (Fax)

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