|
Stock options and management's use of discretionary accruals
Chuohsuan Lee,
State University of New York Plattsburgh
Pervaiz Alam, Kent State University
ABSTRACT. Prior studies report that firms get increasingly concerned when stock options are out-of-money (Balachandran et al., 2004). We argue that management of firms, knowing that the board of directors will either re-price, cancel or re-issue stock options when stock options are underwater, is likely to use discretionary accruals to depress earnings and stock price prior to the board’s decision. Subsequent to the decision by the board to lower the exercise price of newly issued stock options firm’s management is likely to release favorable information about the prospects of the firm and will use income-increasing discretionary accruals in the hope of increasing stock prices. Our finding shows that the status of stock options and the possibility of re-pricing options provide incentives for management to time the reversal of discretionary accruals to benefit from the exercise of stock options.
Full-Text is no longer available online. Please contact the author(s) for more information about this manuscript.
Back to Session Listing
|