 What lies beneath the implementation of expensing equity-based compensation?Hsuan-Chu Lin, Ren-Raw Chen, Ting-Kai Chou and Michael Long Pacific-Basin Finance Journal, 2017, vol. 46, issue PA, 78-93 Abstract: This study explores whether SFAS 39, which mandated expensing of equity-based compensation (EBC) causes an unexpected wealth reallocation between debtholders and shareholders. Through a structural framework under the economic measure, we theorize that mandatory EBC expensing affects the priority of free cash flow payment mechanisms and thereby transfers firm value to equity at the expense of debt. Based on 582 Taiwan listed firms over the period 2005–2010, we empirically find that a significant increase in equity value as a percentage of firm value for firms that were affected by EBC expensing rule, compared to firms that were not affected. The wealth transfer from debtholders to shareholders is more salient for heavy EBC users. We also document that firms with more intensive debtholder-shareholder conflicts experience a larger wealth transfer than their counterparts do. Overall, our analyses suggest that mandated expensing of EBC leads to a value transfer from debt to equity. Keywords: Equity-based compensation; SFAS 39; Wealth transfer (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:46:y:2017:i:pa:p:78-93 DOI: 10.1016/j.pacfin.2017.06.005 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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