Investors Like Firms that Expense Employee Stock Options and They Dislike Firms that Fail to Expense

Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005

Posted: 1 Apr 2005

See all articles by Fayez A. Elayan

Fayez A. Elayan

Brock University-Goodman School of Business

Kuntara Pukthuanthong

University of Missouri, Columbia

Richard Roll

California Institute of Technology

Abstract

During 2002 and 2003, 140 publicly traded US firms announced their intention to recognize an accounting expense when stock options are granted to employees. Many similar firms elected not to expense options. We study the stock market's reaction. There is no evidence whatsoever that expensing options reduces the stock price. To the contrary, around announcement dates, we find significant price increases for firms electing to expense options and significant price declines for industry/size/performance-matched firms that did not announce expensing at the same moment. The average relative change in market values is 3.65% during a 6 day window around the announcement. The magnitude of the market's reaction to expensing depends on agency costs, the magnitude of option expenses, and financial reporting costs. The market's reaction does not seem to be affected by contracting costs (e.g. induced by debt covenants), growth opportunities, or potential political repercussions. Moreover, the decision to expense and the magnitude of the market's reaction are not signals of future operating performance. The market seems to react favorably to transparent reporting while it penalizes firms that give the appearance of having something to hide.

Keywords: Employee stock options, expense recognition, transparency

JEL Classification: G00

Suggested Citation

Elayan, Fayez A. and Pukthuanthong, Kuntara and Roll, Richard W., Investors Like Firms that Expense Employee Stock Options and They Dislike Firms that Fail to Expense. Journal of Investment Management, Vol. 3, No. 1, First Quarter 2005, Available at SSRN: https://ssrn.com/abstract=680842

Fayez A. Elayan (Contact Author)

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: https://www.kuntara.net/

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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