The Effect of Accounting on Economic Behavior: Evidence from Stock Option Repricing

Posted: 6 Dec 1999

See all articles by Mary Ellen Carter

Mary Ellen Carter

Boston College - Department of Accounting

Luann J. Lynch

University of Virginia - Darden School of Business

Date Written: January 2001

Abstract

We examine stock option repricing activity that coincided with the December 4, 1998 FASB announcement regarding accounting for repriced employee stock options. The accounting treatment requires recognition of compensation expense in future periods if there is an increase in stock price after repricing. We find that repricing firms experience significant negative cumulative abnormal returns surrounding the December 4, 1998 FASB announcement date. We document a significant increase in repricing activity in the 12-day window between the announcement date and the proposed effective date, during which firms could reprice without taking a charge to earnings, and a significant decrease in repricing activity after the proposed effective date. This evidence suggests that the FASB announcement of the new accounting altered firms' economic decisions. In examining firms' decisions to reprice in the 12-day window to avoid the accounting charge, we find that positive earnings firms, growth firms, firms experiencing increasing earnings patterns, and firms with the greater potential effect on earnings are more likely than other firms to reprice in this window. In addition, we find that firms' prior repricing behavior affects their decision to reprice in this window, suggesting that there are implicit costs associated with repricing. The evidence is consistent with firms' trading off valuation implications of repricing to avoid an earnings charge against these implicit costs associated with repricing in the window.

Note: Previously titled "Does Accounting Affect Economic Behavior? Evidence from Stock Option Repricing"

JEL Classification: G32, J33, M41

Suggested Citation

Carter, Mary Ellen and Lynch, Luann J., The Effect of Accounting on Economic Behavior: Evidence from Stock Option Repricing (January 2001). Available at SSRN: https://ssrn.com/abstract=194688

Mary Ellen Carter (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
2,545
PlumX Metrics