Stock Options and Management'S Use of Discretionary Accruals

34 Pages Posted: 3 Sep 2008

See all articles by Chuohsuan Lee

Chuohsuan Lee

State University of New York (SUNY) Plattsburgh

Pervaiz Alam

Kent State University

Date Written: September 3, 2008

Abstract

We examine the differences in the use of discretionary accruals between firms with in-the-money stock options and firms with out-of-money (i.e., underwater) stock options over a longer time horizon. We contend that management anticipating action from the board of directors may use less (more) positive (negative) discretionary accruals to decrease earnings and stock price prior to the decision of the board of directors to re-price options. Our results are consistent with our expectation. Our finding implies that the status of stock options provides incentives for management to time the reversal of discretionary accruals for future wealth increases from the exercise of stock options.

Keywords: stock options, underwater, discretionary accruals

JEL Classification: G32

Suggested Citation

Lee, Chuohsuan and Alam, Pervaiz, Stock Options and Management'S Use of Discretionary Accruals (September 3, 2008). Available at SSRN: https://ssrn.com/abstract=1262768 or http://dx.doi.org/10.2139/ssrn.1262768

Chuohsuan Lee (Contact Author)

State University of New York (SUNY) Plattsburgh ( email )

Plattsburgh, NY 12903
United States

Pervaiz Alam

Kent State University ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1121 (Phone)
330-672-2548 (Fax)

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