The policy consequence of expensing stock‐based compensation

Ching‐Chieh Lin (Department of Accounting, I‐Shou University, Kaohsiung, Taiwan)
Chi‐Yun Hua (Department of Accounting, Fu Jen Catholic University, Taipei, Taiwan)
Shu‐Hua Lee (Department of Accounting, National Taipei University, Taipei, Taiwan)
Wen‐Chih Lee (Graduate Institute of Commerce, National Kaohsiung University of Applied Sciences, Kaohsiung, Taiwan)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Publication date: 1 March 2011

Abstract

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.

Keywords

Citation

Lin, C., Hua, C., Lee, S. and Lee, W. (2011), "The policy consequence of expensing stock‐based compensation", International Journal of Accounting & Information Management, Vol. 19 No. 1, pp. 80-93. https://doi.org/10.1108/18347641111105944

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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