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Does Recognition Versus Disclosure Really Matter? Evidence from the Market Valuation of Recognition of Employee Stock Option Expenses
Flora Niu,
Wilfrid Laurier University
Bixia Xu, Wilfrid Laurier University
ABSTRACT. Based on a sample of Canadian public firms, we find that pro forma compensation expenses disclosed prior to the new accounting regulation are significantly negatively associated with stock returns, suggesting that the market interprets these expenses as a type of expense. In contrast, recognized stock option expenses from using the fair value approach mandated by the expensing rules are significantly positively associated with stock returns, indicating that the market now interprets these expenses as a type of asset that contributes positively to firm valuation. Overall, the evidence suggests that the mandatory expensing requirement increases the perceived quality of financial statements and mitigates the perception that firms use stock options opportunistically. Consequently, the market translates the incentive effect of employee stock options into firm value.
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