The Earnings Quality Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation

Shilpa Manaktala, John Phillips () and Karen Teitel ()
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Shilpa Manaktala: University of Connecticut, School of Business
John Phillips: University of Connecticut, School of Business
Karen Teitel: Department of Economics, College of the Holy Cross

No 413, Working Papers from College of the Holy Cross, Department of Economics

Abstract: We identify 133 firms that between July and December 2002, announced plans to voluntarily adopt the fair value method of accounting for stock-based compensation. We investigate whether such announcements increased the quality of these firms’ earnings as perceived by market participants. Answering this research question not only provides evidence relevant to the debate surrounding the expensing of employee stock options, but doing so provides evidence that conservative accounting choices in general lead to higher perceived earnings quality. Using two measures of earnings quality, the price-earnings relation and the earnings response coefficient, we find evidence consistent with an increase in perceived earnings quality for these firms relative to a control set of firms that in 2002 did not announce plans to adopt the SFAS 123 stock-based compensation recognition provisions.

Keywords: SFAS; stock options; accounting; expensing options; fair value method (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-12
New Economics Papers: this item is included in nep-acc, nep-bec, nep-fin and nep-lab
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https://hcapps.holycross.edu/hcs/RePEc/hcx/HC0413-Teitel_Options.pdf 2004 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:hcx:wpaper:0413

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