Journal Articles

The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition and Management Disavowals

2006, Accounting Review

James Frederickson, Frank Hodge, James Pratt

Abstract

In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.

Citation

Frederickson, James, Frank Hodge, and Jamie Pratt (2006), “The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition and Management Disavowals,” The Accounting Review, October. 

Kelley School of Business

Faculty & Research