AAA Spark Meeting of Regions

Stock-Based Compensation Expense and Financial Analyst Forecasts

• In Event: Executive Compensation

Abstract

We investigate the association between stock-based compensation (SBC) expense and the properties of financial analysts’ annual earnings forecasts (i.e., accuracy and dispersion). Using data on Standard & Poor’s 1500 companies from 2006 to 2018, we find that analyst forecast error and dispersion are both positively related to the magnitude of SBC expense. Next, we split total SBC expense into those arising from stock option grants and stock awards and find that stock option expense has a larger impact on analyst forecast errors and dispersion. We further conduct a series of cross-sectional analyses. First, we find that the association between analyst forecast properties and SBC expense is stronger when: (1) performance-vesting equity compensation encompasses a smaller proportion of total equity grants; and (2) a higher percentage of total stock options and restricted stocks is granted to top executives. We also find that analyst forecast errors and dispersion are more strongly associated with SBC expense when the majority of analysts include stock-based compensation in their forecasts. Overall, our results suggest that the measurement issues and uncertain economic costs and benefits of equity grants present complex challenges for financial analysts to fully incorporate fair value accounting information related to SBC expense.

Authors

• Anthony Chen, California State University, Fullerton

• Jianxin Gong, Cal State University - Fullerton

• Siyi Li, California State University, Fullerton