Stock Option Expensing: The Role of Corporate Governance

Analysis of the corporate stock option expensing decision (before the practice became mandatory in 2006) continues to be of interest because it provides insight into the underlying factors affecting not only expense recognition, but the overall corporate decision-making process. Using a sample of 207 companies that volunteered to expense options and more than 1,000 non-expensing firms, the authors found that companies that provide more disclosure and appeared to have a stronger alignment of managerial and shareholder interests were also more likely to expense stock options-a finding that the authors view as indirect evidence that voluntary expensing was more likely to occur in companies that practiced effective corporate governance. And consistent with the prediction of efficient market theorists, the study also found no significant market reaction to announcements of these decisions to expense options. Copyright (c) 2008 Morgan Stanley.