IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v46y2017ipap78-93.html
   My bibliography  Save this article

What lies beneath the implementation of expensing equity-based compensation?

Author

Listed:
  • Lin, Hsuan-Chu
  • Chen, Ren-Raw
  • Chou, Ting-Kai
  • Long, Michael

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.

Suggested Citation

  • Lin, Hsuan-Chu & Chen, Ren-Raw & Chou, Ting-Kai & Long, Michael, 2017. "What lies beneath the implementation of expensing equity-based compensation?," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 78-93.
  • Handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:78-93
    DOI: 10.1016/j.pacfin.2017.06.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X17302834
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.pacfin.2017.06.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bla:jfinan:v:53:y:1998:i:6:p:1975-1999 is not listed on IDEAS
    2. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
    3. Adams, John C. & Mansi, Sattar A., 2009. "CEO turnover and bondholder wealth," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 522-533, March.
    4. Lins, Karl V., 2003. "Equity Ownership and Firm Value in Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 159-184, March.
    5. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. repec:bla:jfinan:v:58:y:2003:i:2:p:895-920 is not listed on IDEAS
    8. Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19, January.
    9. Lawrence D. Brown & Yen-Jung Lee, 2011. "Changes in Option-Based Compensation Around the Issuance of SFAS 123R," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(9-10), pages 1053-1095, November.
    10. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, April.
    11. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. April Klein & Emanuel Zur, 2009. "Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors," Journal of Finance, American Finance Association, vol. 64(1), pages 187-229, February.
    14. Joan Farre-Mensa & Roni Michaely & Martin Schmalz, 2014. "Payout Policy," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 75-134, December.
    15. Hilscher, Jens & Şişli-Ciamarra, Elif, 2013. "Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 140-158.
    16. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eisdorfer, Assaf & Giaccotto, Carmelo & White, Reilly, 2013. "Capital structure, executive compensation, and investment efficiency," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 549-562.
    2. Shih-Chuan Tsai, 2005. "Dynamic Models of Investment Distortions," Review of Quantitative Finance and Accounting, Springer, vol. 25(4), pages 357-381, December.
    3. Isil Erol & Dogan Tirtiroglu, 2011. "Concentrated Ownership, No Dividend Payout Requirement and Capital Structure of REITs: Evidence from Turkey," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 174-204, July.
    4. Chae, Joon & Kim, Sungmin & Lee, Eun Jung, 2009. "How corporate governance affects payout policy under agency problems and external financing constraints," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2093-2101, November.
    5. Wang, Hao, 2011. "Managerial entrenchment, equity payout and capital structure," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 36-50, January.
    6. Jory, Surendranath & Ngo, Thanh & Susnjara, Jurica, 2017. "The effect of shareholder activism on bondholders and stockholders," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 328-344.
    7. Ali, Searat & Liu, Benjamin & Su, Jen Je, 2018. "Does corporate governance quality affect default risk? The role of growth opportunities and stock liquidity," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 422-448.
    8. Kevin Aretz & Söhnke M. Bartram, 2010. "Corporate Hedging And Shareholder Value," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(4), pages 317-371, December.
    9. Min Jung Kang & Andy (Y. Han) Kim, 2017. "Bankers on the Board and CEO Incentives," European Financial Management, European Financial Management Association, vol. 23(2), pages 292-324, March.
    10. Joshua D. Anderson & John E. Core, 2018. "Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options," Management Science, INFORMS, vol. 64(9), pages 4408-4432, September.
    11. Amitava Roy, 2015. "Dividend Policy, Ownership Structure and Corporate Governance: An Empirical Analysis of Indian Firms," Indian Journal of Corporate Governance, , vol. 8(1), pages 1-33, June.
    12. Song, Keke & Wang, Jun, 2023. "When banks become shareholder activists," Journal of Banking & Finance, Elsevier, vol. 153(C).
    13. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    14. Assaf Eisdorfer, 2009. "Convertible Debt And Risk‐Shifting Incentives," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 32(4), pages 423-447, December.
    15. Constantin Mellios, 2003. "La gestion des risques financiers par les entreprises : explications théoriques versus études empiriques," Revue d'Économie Financière, Programme National Persée, vol. 72(3), pages 243-264.
    16. Fortin, Steve & Subramaniam, Chandra & Wang, Xu (Frank) & Zhang, Sanjian (Bill), 2014. "Incentive alignment through performance-focused shareholder proposals on management compensation," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(2), pages 130-147.
    17. Lin, Hsuan-Chu & Chou, Ting-Kai & Wang, Wen-Gine, 2012. "Capital structure and executive compensation contract design: A theoretical and empirical analysis," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 209-224.
    18. Ali, Searat & Hussain, Nazim & Iqbal, Jamshed, 2021. "Corporate governance and the insolvency risk of financial institutions," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    19. Bettis, J. Carr & Bizjak, John & Coles, Jeffrey L. & Kalpathy, Swaminathan, 2018. "Performance-vesting provisions in executive compensation," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 194-221.
    20. Jiyeon Yun & James M. Carson & David L. Eckles, 2023. "Executive compensation and corporate risk management," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(2), pages 521-557, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:78-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.