Adam Bowe
Queensland Investment Corporation
Ping-Sheng Koh
University of Queensland
Irene Tutticci
University of Queensland
Abstract: This study investigates whether the net cost assigned by the market to employee stock options (ESO) in the U.S. market holds in the Australian setting. Currently, Australia has minimal disclosure requirements in relation to ESO, however, a number of firms voluntarily disclose sufficient information to value this form of remuneration. Using a sample of Australian firms that supply sufficient information to determine a Black-Scholes value for their ESO in the sample period, price and returns models are used to test the value relevance of ESO. The results are compared to a matched sample of U.S. firms to examine whether differences in the incentives to disclose ESO in the two settings affects the way in which investors treat ESO. Consistent with prior research, SFAS 123 ESO values for the sample of U.S. firms are negatively associated with price and returns. However, the Australian price regressions yield significant positive coefficients on measures of ESO values. The results indicate that ESO in the Australian market are perceived to have a net benefit to shareholders. Differences in the incentives to issue and report ESO may explain the results. The results of the returns model for the Australian sample are less conclusive. These results show the current year ESO values having no significant association with returns and the one-year change in ESO value conveying positive information to the market.
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