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Accounting for stock-based compensation: an extended clean surplus relation

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  • Hess, Dieter E.
  • Lüders, Erik

Abstract

Residual income valuation is based on the assumption that the clean surplus relation holds. As pointed out by Ohlson (2000), among others, the standard clean surplus relation is frequently violated. Moreover, standard residual income valuation models rest on the implicit assumption that future stated earnings belong to current shareholders only. This is clearly invalid for companies granting employee options. In order to overcome these deficiencies, this paper establishes an extension of the clean surplus relation and derives simple analytical solutions for the value of outstanding stocks in terms of already known accounting information.

Suggested Citation

  • Hess, Dieter E. & Lüders, Erik, 2001. "Accounting for stock-based compensation: an extended clean surplus relation," ZEW Discussion Papers 01-42, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5397
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    File URL: https://www.econstor.eu/bitstream/10419/24464/1/dp0142.pdf
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    References listed on IDEAS

    as
    1. Acharya, Viral V. & John, Kose & Sundaram, Rangarajan K., 2000. "On the optimality of resetting executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 65-101, July.
    2. Chance, Don M. & Kumar, Raman & Todd, Rebecca B., 2000. "The 'repricing' of executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 129-154, July.
    3. Aboody, David, 1996. "Market valuation of employee stock options," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 357-391, October.
    4. Brenner, Menachem & Sundaram, Rangarajan K. & Yermack, David, 2000. "Altering the terms of executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 103-128, July.
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    Cited by:

    1. Renes, S., 2020. "When Debit=Credit. The balance constraint in bookkeeping, its causes and consequences for accounting," ERIM Report Series Research in Management ERS-2020-005-FA, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Wayne Guay & Richard Sloan, 2003. "Accounting for Employee Stock Options," American Economic Review, American Economic Association, vol. 93(2), pages 405-409, May.

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    More about this item

    Keywords

    Residual income valuation; clean surplus accounting; US-GAAP; employee stock option programs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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