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Economic implications of proposed accounting for stock-based compensation

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  • Samir El-Gazzar
  • Philip Finn

Abstract

This article examines the market expectations of the proposed accounting changes for stock-based compensation in the exposure draft that preceded the Statement of Financial Accounting Standards No. 123. The exposure draft made recommendations that significantly differed from current practice. Affected firms expressed concern that the proposed changes would drastically reduce their reported earnings. This could lead to firms becoming less attractive to capital sources (resulting in higher costs of capital) and firms refraining from using stock options to attract talented managers and entrepreneurs. The market test shows that affected firms experienced negative security market prices contemporaneous with issuance of the exposure draft. Cross-sectional analyses indicate that the magnitude of price decline is associated with measures of high risk and less mature firms. Copyright International Atlantic Economic Society 1998

Suggested Citation

  • Samir El-Gazzar & Philip Finn, 1998. "Economic implications of proposed accounting for stock-based compensation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 26(3), pages 259-273, September.
    • Handle: RePEc:kap:atlecj:v:26:y:1998:i:3:p:259-273
    DOI: 10.1007/BF02299344
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    1. Schipper, Katherine & Thompson, Rex & Weil, Roman L, 1987. "Disentangling Interrelated Effects of Regulatory Changes on Shareholder Wealth: The Case of Motor Carrier Deregulation," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 67-100, April.
    2. Hughes, John S. & Ricks, William E., 1984. "Accounting for retail land sales : Analysis of a mandated change," Journal of Accounting and Economics, Elsevier, vol. 6(2), pages 101-132, August.
    3. Schipper, K & Thompson, R, 1983. "The Impact Of Merger-Related Regulations On The Shareholders Of Acquiring Firms," Journal of Accounting Research, Wiley Blackwell, vol. 21(1), pages 184-221.
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    Cited by:

    1. Richard Schroeder & David A. Schauer, 2008. "SFAS No. 123R: the controversy and its economic consequences," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(3), pages 295-306, March.

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