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- Title
Which approach to accounting for employee stock options best reflects market pricing?
- Authors
Landsman, Wayne; Peasnell, Ken; Pope, Peter; Yeh, Shu
- Abstract
We use a residual income valuation framework to compare equity valuation implications of four approaches to employee stock options (ESOs) accounting: APB 25 “recognize nothing”, SFAS 123 (revised) “recognize ESO expense”, FASB Exposure Draft “recognize and expense ESO asset” and “recognize ESO asset and liability”. Theoretical analysis shows only grant date recognition of an asset and liability, and subsequent marking-to-market of the liability, results in accounting numbers that capture the dilution effects of ESOs on current shareholder value. Out-of-sample equity market value prediction tests and in-sample comparisons of model explanatory power also support the “recognize ESO asset and liability” method.
- Subjects
EMPLOYEE stock options; STOCK options; MARKET value; LIABILITIES (Accounting); ASSETS (Accounting); EMPLOYEE benefits
- Publication
Review of Accounting Studies, 2006, Vol 11, Issue 2/3, p203
- ISSN
1380-6653
- Publication type
Article
- DOI
10.1007/s11142-006-9008-x