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The policy consequence of expensing stock-based compensation


  • Ching-Chieh Lin
  • Chi-Yun Hua
  • Shu-Hua Lee
  • Wen-Chih Lee


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.

Suggested Citation

  • Ching-Chieh Lin & Chi-Yun Hua & Shu-Hua Lee & Wen-Chih Lee, 2011. "The policy consequence of expensing stock-based compensation," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(1), pages 80-93, March.
  • Handle: RePEc:eme:ijaipp:v:19:y:2011:i:1:p:80-93

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    References listed on IDEAS

    1. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    2. Hichem Khlif & Mohsen Souissi, 2010. "The determinants of corporate disclosure: a meta-analysis," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 18(3), pages 198-219, September.
    3. Chih-Ying Chen, 2003. "Investment Opportunities and the Relation Between Equity Value and Employees' Bonus," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30, pages 941-974.
    4. 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.
    5. Espahbodi, Hassan & Espahbodi, Pouran & Rezaee, Zabihollah & Tehranian, Hassan, 2002. "Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 343-373, August.
    6. Wayne Guay & Richard Sloan, 2003. "Accounting for Employee Stock Options," American Economic Review, American Economic Association, vol. 93(2), pages 405-409, May.
    7. Bushman, Robert M. & Smith, Abbie J., 2001. "Financial accounting information and corporate governance," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 237-333, December.
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    Cited by:

    1. Nancy Mohan & M. Fall Ainina, 2012. "The effect of SFAS No. 123(R) on executive incentive pay," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 20(3), pages 282-299, July.


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