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Disclosure versus recognition: the case of expensing stock options

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  • Xiaoyan Cheng
  • David Smith

Abstract

The SFAS 123R comment process generated over 6,500 comment letters, most of which were against the standard’s enactment. This outpouring of emotion indicates that many believe that disclosure versus recognition matters. Our paper provides evidence for the debate whether managers’ discretion, motivation, and accuracy of stock option estimates differ under the recognition and disclosure reporting regimes. We compare firms that are mandatorily forced to recognize stock options expense with those voluntarily choosing to do so. First we find that mandatory firms (versus voluntary) with more intensive stock option granting tend to understate option estimates, especially in the post SFAS123R period. Our results suggest that a higher recognition cost motivates firms for doing so. Second, we find that mandatory firms with lower future operating risk have better accuracy in the post SFAS123R period, as compared to themselves in the pre SFAS123R period and voluntary firms in the post SFAS123 period. Our results support the notion that the informativeness of option estimates explains the level of accuracy. The findings of this paper add to the debate on the benefits of recognizing stock option expenses. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Xiaoyan Cheng & David Smith, 2013. "Disclosure versus recognition: the case of expensing stock options," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 591-621, May.
    • Handle: RePEc:kap:rqfnac:v:40:y:2013:i:4:p:591-621
    DOI: 10.1007/s11156-012-0290-3
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    References listed on IDEAS

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    Cited by:

    1. Alexander Merz, 2020. "Expensing performance-vested executive stock options: is there underreporting under IFRS 2?," Journal of Business Economics, Springer, vol. 90(3), pages 461-493, April.
    2. Chii-Shyan Kuo & Xu Wang & Shih-Ti Yu, 2016. "Investor perception of managerial discretion in valuing stock options: an empirical examination," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 733-773, October.
    3. Hsieh, Su-Jane & Liu, Shuming, 2021. "The cost-of-equity implications of off-balance sheet pension liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    4. Kusano, Masaki & Sakuma, Yoshihiro & Tsunogaya, Noriyuki, 2016. "Economic consequences of changes in the lease accounting standard: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 73-88.
    5. Merz, Alexander, 2017. "What have we learned from SFAS 123r and IFRS 2? A review of existing evidence and future research suggestions," Journal of Accounting Literature, Elsevier, vol. 38(C), pages 14-33.
    6. Masaki KUSANO, 2022. "Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting," Discussion papers e-22-008, Graduate School of Economics , Kyoto University.
    7. Mustafa Ciftci & Nan Zhou, 2016. "Capitalizing R&D expenses versus disclosing intangible information," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 661-689, April.

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    More about this item

    Keywords

    Expensing stock options; 123R; Motivation; Accuracy; Recognition; M41;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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