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Employee Stock Options: The Importance of Differentiating Between Proceeds and Compensation

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Item Summary

Title: Employee Stock Options: The Importance of Differentiating Between Proceeds and Compensation
Authors: Hill, Mary
Ruch, George
Keywords: employee stock options
common equity risk
liabilities versus equity
Issue Date: 31 Aug 2017
Abstract: Prior research finds a negative association between outstanding employee stock options (ESOs) and common equity risk, suggesting that outstanding ESOs possess economic characteristics of equity rather than liabilities. We examine whether this association is attributable to (1) the expected value of the cash proceeds to be received upon ESO exercise (“ESO-Proceeds”), or (2) the expected value of compensation to be paid to ESO holders for services provided (“ESO-Compensation”). This distinction is important because the question of whether outstanding ESOs possess characteristics of liabilities or equity inherently pertains to ESO-Compensation, not ESO-Proceeds. Our findings indicate that the negative association observed in prior research is attributable to ESO-Proceeds rather than ESO-Compensation. Additionally, we find that ESO-Compensation is positively associated with common equity risk, which suggests that outstanding ESOs possess characteristics of liabilities rather than equity. Overall, our evidence illustrates the importance of differentiating between ESO-Compensation and ESO-Proceeds when addressing financial reporting questions related to outstanding ESOs.
Description: Inquiries about this document can be made to HARC@hawaii.edu
URI/DOI: http://hdl.handle.net/10125/51961
Appears in Collections:11 Financial: Financial Reporting Quality / Credit Ratings / Earnings Smoothing / Earnings Comparability (FAR3)


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