Accounting for Employee Stock Options: What can We Learn from the Market's Perceptions?

26 Pages Posted: 14 Apr 2010

See all articles by Emanuel Bagna

Emanuel Bagna

affiliation not provided to SSRN

Mauro Bini

Bocconi University - Department of Accounting

Ronald Geoffrey Bird

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN)

Francesco Momentè

Bocconi University - Department of Accounting

Francesco Reggiani

University of Zurich

Abstract

The scope of this is paper is to provide new empirical evidence on the value relevance of employee stock options (ESOs) in Europe. We show, empirically, that the market participants when pricing a firm's equity place approximately the same valuation weights on the ESO-deferred compensation expense (the so called “ESO asset”) and the compensation option liability (the so called “ESO liability”). Our empirical findings support the theoretical work of Ohlson and Penman who suggest that the deferred compensation expense be treated as a contra-liability. The second contribution of our work rests on the nature of the ESO expense. We show that the distinction between persistent and non-persistent ESO expenses is of critical importance for the market participants. Accordingly, an improved accounting disclosure should assist the investors in assessing the long-term goals of the ESO plans at the firm level.

JEL Classification: G12, M41, M7

Suggested Citation

Bagna, Emanuel and Bini, Mauro and Bird, Ronald Geoffrey and Momentè, Francesco and Reggiani, Francesco, Accounting for Employee Stock Options: What can We Learn from the Market's Perceptions?. Journal of International Financial Management & Accounting, Vol. 21, No. 2, pp. 161-186, Summer 2010, Available at SSRN: https://ssrn.com/abstract=1589092 or http://dx.doi.org/10.1111/j.1467-646X.2010.01039.x

Emanuel Bagna (Contact Author)

affiliation not provided to SSRN ( email )

Mauro Bini

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Ronald Geoffrey Bird

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+ 612 9514 7716 (Phone)
+ 612 9514 7711 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Francesco Momentè

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Francesco Reggiani

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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