The Market Reaction To Voluntary Stock Option Expense Recognition Announcements

Abstract

Recently, numerous firms announced that they would voluntarily begin recognizing the SFAS 123 expense. We use standard event-study methodology and regression analysis to analyze the equity valuation effects of these announcements. SFAS 123 requires firms to calculate the fair value of stock options granted but allows firms to either recognize the expense in their income statements or simply disclose the impact on net income in financial statement footnotes. Our results reveal statistically significant positive abnormal announcement period returns for the full sample of firms analyzed, with results mainly driven by firms that are early (July or August 2002 announcements) announcers. In addition, regressions confirm a significant negative relationship between the size of the stock option expense and the abnormal announcement returns.