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Abstract
This dissertation provides some evidence regarding the consequences of expensing stock options. The first essay examines whether expensing stock option affects managerial discretion of stock option estimates and explores underlying motivations and subsequent consequences in terms of accuracy. The second essay investigates the impact of expensing stock options on accruals quality and subsequent financial reporting consequence in terms of information asymmetry. The following two sections outline the two separate essays.
Essay 1. The broad objective of the first essay is to examine whether the new accounting standard affects managerial discretion of stock option estimates and to explore underlying motivations and subsequent consequences in terms of accuracy. Overall, I find that mandatory firms have a tendency to understate option estimates. Specifically, firms who wait for mandatory adoption understate option expenses to a larger extent under recognition regime and managerial opportunism accounts for such understatement after the adoption of SFAS123R. The tendency to manipulate stock-based compensation expense downward in mandatory firms, especially in the post expensing period, could be driven by the cost of recognition consideration. Finally, I find that there is an improvement in accuracy in mandatory firms after the adoption of SFAS123R. However, none of the compensation and informational incentives explains this.
Essay 2. This paper investigates whether expensing stock options affects accruals quality, and financial reporting consequence: information asymmetry in voluntarily and mandatorily expensing firms. Overall, I find that a decreased use of stock options in the post expensing period induces an improved accruals quality in both of the mandatory and voluntary groups. The level of improved accruals quality does not differ between mandatory and voluntary expensing firms. Finally, I find improved accruals quality for the post expensing period is associated with lower information asymmetry, as reflected in lower bid-ask spread and increased forecast accuracy.
