FINANCIAL ANALYST SURVEY OF SFAS 123(R) - EMPLOYEE STOCK OPTION COMPENSATION EXPENSE

Abstract

This study examines practitioners’ perceptions of uses of stock option compensation expense. Specifically, Statement of Financial Accounting Standard (SFAS) No. 123(R) requires firms to report the estimated fair value of stock option compensation as an expense over the employees’ required service period. There has been much controversy surrounding this standard: academics, industry leaders and regulators question the reliability of estimating stock option value; consequently, the usefulness of reporting stock option expense in financial statements has been challenged. We provide insights into this debate by finding that financial analysts, on average, support the expensing of stock option expense. Further, approximately two-thirds of analysts use stock option expense in their forecast of short and long term earnings. We also find that analysts’ practices regarding stock option expense are not swayed by managements’ exclusion of stock option expense in earnings announcements. Together, our findings suggest that financial analysts believe stock option expense contains meaningful information about firm performance.