Butzbach, Olivier and Di Carlo, Ferdinando (2008): The effects of stock options accounting regulation on corporate governance: A comparative European study.
Download (93Kb) | Preview
The use of stock options as executive compensation, after having developed in the United States in the 1980s and 1990s, has spread to continental Europe in the past fifteen years. The increasing weight of stock options in this region of the world raises various issues and feeds a vast literature dealing with the relationship between corporate managers’ pay and performance. A good chunk of that literature is based on agency theory. In this line of thought a principal (the shareholder) delegates the management of the firm to an agent (the manager) and simultaneously sets up a series of control devices to make sure that the agent will act in his (the shareholder’s) interest (Jensen and Meckling, 1976). Agency theory does not limit itself with identifying potential conflicts of interests between managers and shareholders: it also explores the various means through which the firm’s owners try to make sure that managers seek to maximize their (the owners’) objectives. Optimal contracting theory precisely aims at identifying such means. According to that theory, the firm’s compensation policies should contribute to align the managers’ interests on those of the shareholders – to make sure, in other words, that the agent behaves in the interest of the principal (Murphy, 1999). Such a view, applied to executive compensation plans, has been recently exposed to a strong scepticism. The optimal contracting theory has a weak empirical basis, especially when applied to stock options – whose adoption does not seem to lead to a significant improvement of firms’ corporate governance. Several authors have underlined the importance of “pay without performance” (Murphy, 1999). Most empirical studies cannot find a positive relationship between the adoption of stock option plans and a significant improvement in firms’ performance. Several explanations have been proposed to explain that puzzle (such as, for instance, Bebchuk & Fried, 2004), all linked to rent extraction theory. According such theory, managers extract a rent from their position: concretely, they increase their capacity to change their own remuneration. In this scheme, stock-options, by nature, cannot succeed in aligning the agent’s interests on the principal’s; on the contrary, they strengthen or create new agency problems. This discussion can be linked to the theme of stock-options accounting and disclosure, which has been recently transformed by the adoption of international accounting standards in most developed economies. Indeed, according to the IFRS 2, stock-options are to be accounted for as labour costs, implying an increase of net liabilities within a specific reserve, with a value equal to the fair value of the options. This accounting method breaks significantly with the past, when disclosure of stock-options plans were left to the discretion of firms. Such a change in disclosure rules might have an impact on the corporate governance of European firms. Indeed, according to a growing literature (see Verrecchia, 2001, for an exhaustive review), disclosure (which can be defined as the publication of previously private relevant information) mediates the relation between a firm’s owners and managers. When disclosure is failing, corporate governance worsens, in that managers are able to hide the decisions which damage or threaten owners’ interests. In fact, in the current context, characterized by national and international regulatory reforms in favour of a more stringent disclosure, the academic discussion has shifted its focus from the causes to the consequences of disclosure, especially related to corporate governance (see Bushman & Smith, 2001). Turning the previous reasoning on its head, one can argue that, in presence of information asymmetries and agency conflicts between owners and managers, disclosure acquires a strategic value (Healy & Palepu, 2001). In particular, a better disclosure could help reduce contractual problems linked to agency relations (Lo, 2003), through, for instance, corporate reputation. In the (international) context of the adoption of more stringent norms on stock option disclosure (that is their recognition, meaning, as seen above, accounting stock-options as costs in a firm’s financial statement), both discussions are relevant. The new disclosure of stock-options could help reduce the risks of rent extraction tied to that form of compensation and bring them closer to their role as incentives assumed in the optimal contracting theory. The aim of the present work is to understand whether the aforementioned change in stock option accounting regulation has had an impact, and what impact, on the corporate governance of European firms, in the light of the twin literatures cited above. The sample considered here includes all listed Italian and French firms, excluding financial institutions, which have carried out stock option plans in 2005 and 2006, and therefore underwent the change in accounting regulation mentioned above. The analysis relies on qualitative and quantitative data, and focuses on a few key indicators. The findings of the present research suggest that the impact of new accounting rules and more stringent disclosure on listed French and Italian firms is not significant. The firms under study have not shown any substantial change in their management or governance structure, which appear to be still largely driven by the peculiar power distribution proper to each country. Besides, such firms have not received any market premium for introducing executive compensation schemes that theoretically provide incentives for top management to maximize owners’ interests. In any event, those plans remain a minority among listed firms. One could argue, therefore, that in Italy and France, like other countries in the world and the United States in particular, stock options plans have become another instrument used by executive managers to obtain higher remuneration with no link to the true performance of the firm and the interests of its owners. Such a logic is much closer to the rent extraction theory mentioned above (see, for the US, Dechow, Sutton, Sloan, 1996).
|Item Type:||MPRA Paper|
|Original Title:||The effects of stock options accounting regulation on corporate governance: A comparative European study|
|Keywords:||Stock-options; accounting; corporate governance; pay and performance; disclosure|
|Subjects:||M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
K - Law and Economics > K0 - General > K00 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
|Depositing User:||Olivier Butzbach|
|Date Deposited:||25. Apr 2009 02:18|
|Last Modified:||12. Feb 2013 17:58|
Aboody, David, Mary E. Barth and Ron Kasznik (2004), “SFAS N.123 Stock-Based Compensation Expense and Equity Market Value”, The Accounting Review, vol.79, n.2, 251-275.
Amblard, Michel (2005), “La Comptabilisation des Stock-Options: Comptabilité d’Entreprise ou Comptabilité d’Actionnaire?”, Gestion 2000, n. 4/05, July-August, 187-206.
Balsam The effect of equity compensation on voluntary executive turnover (with Setiyono Miharjo, Temple University), Journal of Accounting and Economics, Volume 43 (95-119), 2007.
Barth, Mary E., Greg Clinch & Toshi Shibano (2003), « Market Effects of Recognition and Disclosure », Journal of Accounting Research, vol.41 n.4 (September): 581-609
Bebchuk, Lucian A. and Jesse M. Fried (2003), “Executive Compensation as an Agency Problem”, The Journal of Economic Perspectives, vol.17 n.3 (Summer), pp.71-92.
Bebchuk, Lucian A. and Jesse M. Fried (2004), Pay Without Performance. The Unfulfilled Promise of Executive Compensation, Massachusetts: Harvard University Press.
Bebchuk, Lucian A. and Jesse M. Fried (2005), “Pay Without Performance: Overview of the Issues”, Journal of Applied Corporate Finance, vol.17, n.4 (Fall), pp.8-24.
Borsa Italiana (2006), La Corporate Governance nelle Società dell’Indice S&P/MIB.
Bushee, Brian J. and Christian Leuz (2005), “Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board”, Journal of Accounting and Economics, vol.39, pp.233-264.
Bushman, Robert M. and Abbie J. Smith (2001) "Financial Accounting Information and Corporate Governance", Journal of Accounting & Economics, Vol. 32, Nos. 1-3, August/October/December.
Core, John E., Wayne Guay and David F. Larcker (2003), “Executive Equity Compensation and Incentives: A Survey”, Economic Policy Review, vol.9, n.1, 27-50.
Clarkson, Peter, Ami Lammerts Van Bueren & Julie Walker (2006), “Chief Executive Officer Remuneration Disclosure Quality: Corporate Responses to an Evolving Disclosure Environment”, Accounting and Finance vol.46, 771-796.
Dechow, Patricia M., Hutton, Amy P., Sloan, Richard G. (1996), “Economic Consequences of Accounting for Stock-Based Compensation”, Journal of Accounting Research, vol.34 (September), 1-20.
Dewenter, Kathryn L. and Vincent A. Warther, (1998) “Dividends, Asymmetric Information, and Agency Conflicts: Evidence from a Comparison of the Dividend Policies of Japanese and US Firms”, Journal of Finance vol.53 n.3, pp.879-904.
Doidge Craig, G. Andrew Karolyi and René M. Stulz (2007), “Why do Countries Matter so much for Corporate Governance”, Journal of Financial Economics, vol.86, pp.1-39.
Dye, Ronald (2001), “An Evaluation of the “Essays in Discolsure” and the Disclosure Literature in Accounting”, Journal of Accounting and Economics, vol.32, pp.181-235.
Espahbodi, Hassan, Pouran Espahbodi, Zabidollah Rezaee, Hassan Tehranian (2002), “Stock Price Reaction and Value Relevance of Recognition versus Disclosure: the Case of Stock-Based Compensation”, Journal of Accounting and Economics, vol.33, pp.343-373.
Gao, Lin and P.S.Sudarsanam (2004), “Executive Compensation, Hubris, Corporate Governance: Impact on Managerial Risk-Taking and Value Creation in UK High-Tech and Low-Tech Acquisitions”, Unpupblished paper?
Hanlon, Michelle, Shivaram Rajgopal and Terry Shevlin (2003), “Are Executive Stock Options Associated with Future Earnings?”, Journal of Accounting and Economics, vol.36, pp.3-43.
Healy, Paul M. and Krishna Palepu (2001) "Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of the Empirical Disclosure Literature", Journal of Accounting & Economics, Vol. 31, Nos. 1-3, September.
Imhoff, Eugene A., Robert Lipe and David W. Wright (?), “The Effects of Recognition Versus Disclosure on Shareholder Risk and Executive Compensation”, Journal of Accounting, Auditing & Finance
Jensen, Michael and William Meckling (1976), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Stucture”, Journal of Financial Economics, vol.3, 305-360.
Jensen, Michael and Kevin Murphy (1990), “Performance Pay and Top Management Incentives”, Journal of Political Economy, vol.98, n.2, 225-263.
Lambert, Richard A. (2001), “Contracting Theory and Accounting”, Journal of Accounting and Economics, vol.32, pp.3-87.
Lang, Mark, and Russell Lundholm (1993), “Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures”, Journal of Accounting Research, vol.31 n.2 (Autumn), 246-271.
Larcker, David F. (2003), “Discussion of “Are Executive Stock Options Associated with Future Earnings?””, Journal of Accounting and Economics vol.36, pp.91-103.
Lo, Kin (2003), “Economic Consequences of Regulated Changes in Disclosure: the Case of Executive Compensation”, Journal of Accounting and Economics, vol. 35, 285-314.
Melis, Andrea and Silvia Carta (2007), “The Impact of Accounting Regulation on Corporate Governance. Some Evidence from the Accounting for Stock Options in Italy”, working paper.
Millon Cornett, Marcia, Alan J. Marcus, Hassan Tehranian (2008), “Corporate Governance and Pay-for-Performance: The Impact of Earnings Management”, Journal of Financial Economics, vol.87, pp.357-373.
Morgan, Angela, Annette Poulsen & Jack Wolf (2006), “The Evolution of Shareholder Voting for Executive Compensation Schemes”, Journal of Corporate Finance 12: 715-737
Murphy, Kevin (2002), “Explaining Executive Compensation: Managerial Power vs. the Perceived Cost of Stock Options”, University of Chicago Law Review, vol.69, 847-869.
Oyer, Paul (2004), “Why Do Firms Use Incentives That Have No incentive Effects?”, The Journal of Finance, vol.LIX, n.4, pp.1219-1649 (August)
Quagli, Alberto (2006) “L’adozione degli IAS/IFRS in Italia: i piani di remunerazione a base azionaria”, Giappichelli, Torino,
Verrecchia, Robert E. (2001), “Essays on Disclosure”, Journal of Accounting and Economics, vol.32, 97-180.