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Stock Option Expensing: The Role of Corporate Governance

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  • Sanjay Deshmukh
  • Keith M. Howe
  • Carl Luft

Abstract

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.

Suggested Citation

  • Sanjay Deshmukh & Keith M. Howe & Carl Luft, 2008. "Stock Option Expensing: The Role of Corporate Governance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(2), pages 122-128.
  • Handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:122-128
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    References listed on IDEAS

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    1. Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
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    5. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 107-156.
    6. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    7. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    9. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    10. Wayne Guay & Richard Sloan, 2003. "Accounting for Employee Stock Options," American Economic Review, American Economic Association, vol. 93(2), pages 405-409, May.
    11. Mary E. Barth & Greg Clinch & Toshi Shibano, 2003. "Market Effects of Recognition and Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 581-609, September.
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