The policy consequence of expensing stock‐based compensation

Purpose - The purpose of this paper is to investigate the policy consequences of expensing stock‐based compensation in Taiwan. Design/methodology/approach - Data were collected on listed firms from 2006 to 2008 and a goodness‐of‐fit of accounting earnings valuation model was used to investigate the incremental information content of expensing stock‐based compensation. In addition, two sensitivity indexes were used to investigate the sensitivity between compensation and firm performance before and after income statement recognition of stock‐based compensation. Findings - It was found that the association between earnings and abnormal returns is stronger after expensing compensation. In addition, the relationship between compensation variables, especially stock compensation, and firm performance is stronger after 2008, indicating that expensing compensation reinforces the relationship between compensation and performance. Practical implications - The findings suggest that disclosure and recognition are not substitutes. The findings also have implications for standard setters and for investors attempting to mitigate managers' self‐interested behavior. Originality/value - The accounting treatment of employee stock‐based compensation is a controversial issue among academics, regulators, managers, auditors, and investors. This paper investigates the incremental information content of the new accounting standard and explores whether the relationship between compensation and firm performance has become more transparent than before.