Stock options expensing: An examination of agency and institutional theory explanations

Pamela Brandes, Michael Hadani, Maria Goranova

Research output: Contribution to journalArticle

17 Scopus citations

Abstract

As the debate over appropriate compensation disclosure continues, some firms have volunteered to recognize stock option costs within their income statements. On the one hand, stock option expensing can significantly enhance the legitimacy of the organization and restore shareholders' confidence in corporate governance practices. On the other hand, expensing stock options could decrease firm earnings, leading to unfavorable comparisons to non-expensing firms. Our logit analysis of 402 S&P firms lends partial support to agency theory explanations for stock option expensing; these results depend on the costs associated with expensing. We find stronger support for the institutional theory perspective that mimetic pressures significantly increase the likelihood that firms will expense stock options, independent of the cost. Our findings have important governance implications, suggesting a more complex model of compensation disclosure in which social pressures dominate voluntary compensation disclosure decisions.

Original languageEnglish (US)
Pages (from-to)595-603
Number of pages9
JournalJournal of Business Research
Volume59
Issue number5
DOIs
StatePublished - May 1 2006

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Keywords

  • Compensation
  • Corporate governance
  • Institutional theory
  • Ownership

ASJC Scopus subject areas

  • Marketing

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