The Impact of SFAS No. 123(R) on Financial Statement Conservatism

33 Pages Posted: 23 Mar 2010

See all articles by Wendy Heltzer

Wendy Heltzer

DePaul University - College of Commerce

Date Written: March 18, 2010

Abstract

SFAS No. 123(R) requires firms to recognize the fair value of stock options as compensation expense over the vesting period of the options. Thus, SFAS No. 123(R) leads to an overall increase in financial statement conservatism. However, it is not known whether SFAS No. 123(R) increases conditional and/or unconditional conservatism. Because the different forms of conservatism have different implications for the quality of earnings, I investigate which types of conservatism are impacted by SFAS No. 123(R) to gain insight into the ramifications of the Standard. I find that SFAS No. 123(R) leads to an increase in both unconditional and conditional conservatism. I additionally find that the Standard causes an increased negative relation between contemporaneous economic gains and income. These findings hold outside of the sample period and under a non-priced based model of conservatism.

Keywords: Conservatism, Timeliness, Earnings Quality and Stock Options

JEL Classification: M40, M41

Suggested Citation

Heltzer, Wendy, The Impact of SFAS No. 123(R) on Financial Statement Conservatism (March 18, 2010). Available at SSRN: https://ssrn.com/abstract=1574453 or http://dx.doi.org/10.2139/ssrn.1574453

Wendy Heltzer (Contact Author)

DePaul University - College of Commerce ( email )

Chicago, IL
United States

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