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The economic consequences of regulatory changes in employee stock options on corporate bond holders: SFAS No.123R and structural credit model perspectives

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  • Chen, Tsung-Kang
  • Liao, Hsien-Hsing
  • Chi, Cheng-Ming

Abstract

Based upon structural credit models, we investigate the changes of the effects of employee stock options (ESOs) on bond yield spreads due to the revision of SFAS No. 123R (No.123R) which requires expensing ESO amounts. Using American bond observations from year 1995 to 2007, we find that the revision decreases the information benefits of ESOs disclosure. When controlling for credit ratings and potential endogeneity problems, we also find that ESOs are significantly and positively related to bond yield spreads in post-No.123R period while have an opposite effect in pre-No.123R period. We conclude that information effect mainly drives the ESO’s effects on credit risk in both pre- and post-No.123R periods.

Suggested Citation

  • Chen, Tsung-Kang & Liao, Hsien-Hsing & Chi, Cheng-Ming, 2014. "The economic consequences of regulatory changes in employee stock options on corporate bond holders: SFAS No.123R and structural credit model perspectives," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 381-394.
    • Handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:381-394
    DOI: 10.1016/j.jbankfin.2014.01.011
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    More about this item

    Keywords

    Regulatory changes; SFAS No.123R; Employee stock options; Bond yield spreads; Structural credit model;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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