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In Taiwan, an employee stock bonus (ESB) was accounted for as an earnings distribution rather than an expense – a remnant of the dominance of tax law over accounting standards. To enhance the usefulness of accounting information, the Securities and Futures Bureau (SFB) requires that public companies disclose imputed earnings per share (EPS) by deducting ESB from net income for the financial reporting, effective 30 January, 2003. Although the SFB‐imputed EPS considers ESB as firm expense, it ignores the resultant inflated number of shares outstanding. Therefore, it is expected that the disclosed ESB underestimates the dilutive effects of ESB and limits the intended purpose of the ESB disclosure. The purpose of this paper is to investigate how ESB dilutes EPS and how the SFB‐imputed EPS biases the price‐earnings relation.

Theoretical analyses and empirical tests.

First it was analytically illustrated that: the SFB‐imputed EPS, compared with the proposed EPS measure, underestimates the dilutive effects of ESB; the SFB‐imputed EPS downwardly biases the price‐earnings relation; and the proposed EPS preserves the relation between stock price and earnings. Controlling for firm growth and ESB issuance, empirical results were obtained that are generally consistent with the hypotheses. The SFB‐imputed EPS yields downward‐biased estimates of price earnings multiples. The downward bias is exacerbated as the dilution of ESB increases.

The proposed measurement of diluted EPS reflects the dilutive effect of ESB, upholds the price‐earnings relationship, and offers accounting standard‐setters a useful perspective for thinking about the dilutive effects of ESB.

To examine the value relevance of the Balanced Scorecard (BSC) for equity valuation.

The investigations are based on the empirical relationships between a set of BSC indicators and the exchange ratios for a sample of 32 mergers and acquisitions (M&As) of 14 financial holding companies. Data sources are collected from machine‐readable database, annual financial reports, industry reports and professional magazines. The study period covers years 2000‐2002.

First, the BSC indicators explain as high as 90 percent of the variations of the exchange ratios. Consistent with the spirit of BSC, non‐financial performance measures play an important role in the valuation of financial institutions, incrementally improving about 40 percent of explanatory power. Second, empirical evidence shows that acquiring firms outperform the acquired firms and target firms outperform the non‐target firms in terms of BSC measures.

The small sample size and the limited set of the BSC indicators may constrain the applicability of the results to other industries and time periods.

The empirical results provide a concrete and practical framework for the valuation of intangibles and the application of the BSC in M&As.

The study examines the BSC as a framework for the valuation of intangibles. The empirical results support the usefulness of the BSC in equity valuation and further corroborate a number of extant theories in the M&A literature.