Equity Compensation and Stock Repurchases: The Impact of Stock Option Expensing

• In Event: SESSION 1D: Financial Reporting

Abstract

This paper examines equity compensation practices and stock repurchases subsequent to stock option expensing, which was voluntary over a transitory period but became mandatory in the year 2005. It can be expected that stock option expensing alters equity compensation not only due to the reduction of firm earnings but also to other policies as firms adapt to new regulations. We investigate the effect of this mandatory expensing on equity compensation practices and stock repurchases. Similar to prior research, we find evidence that the composition of CEO compensation is impacted by stock option expensing in that stock option grants decreased and other forms of equity compensation increased after the implementation of SFAS 123R. Expanding on prior research, we examine and find similar significant results on the composition of executive compensation (beyond the CEO). Additionally, we find firm-wide options also are negatively associated with stock option expensing. Lastly, we explore the impact of stock option expensing on stock repurchases and find significant results. However, we predict a negative association and the significant findings are a positive association.

Authors

• Salil K. Sarkar, UTA

• Bonnie R. Quillin, UTA