How does the US equity market react to domestic and international stock-based compensation accounting changes?

Bin, Feng-Shun "Leo" ; Branson, Leonard ; Chen, Dar-Hsin 等

ABSTRACT

This study examines US equity market performance surrounding the announced changes in rules that account for employees' stock-based compensation plans in a corporation. We found the stock market in general reacted negatively to the issuance of SFAS 123 and its preceding exposure draft, but the observed abnormal returns were insignificant. SFAS 148 amended SFAS 123, and a 2004 exposure draft (ED) proposed additional revisions. The updated treatment of stock based compensation generally caused positive but insignificant pronouncement effects. The insignificance of price reactions to the issuance of SFAS 148 or the ED was not sensitive to a firm's size, domesticity, disclosure requirement, exchange-listing regulation or industry sector.

When the US Congress took legislative action which threatened FASB's independence and authority on the SBC accounting policy issues, the stock market reacted unfavorably, except for those foreign-based ADR-issuing firms. We also report on the market response to the latest international developments in "share-based payment" accounting reforms, including IASB's IFRS 2.

INTRODUCTION

The American and global financial accounting policy makers have been striving to improve the financial disclosures of publicly traded firms to provide better information to investors. This need for continuous improvement in accounting standards has led to ongoing updates to General Accepted Accounting Principles (GAAP). Around the world, stock-based compensation (SBC) plans have become increasingly popular for firms that attempt to tie their employees' rewards to performance. These compensation methods continue to change as firms attempt to find better ways to tie compensation to performance. The most recent developments include General Electric's introduction of "performance share units" in September 2003 that replaced the traditional stock options and restricted stocks granted to the firm's top executives (The Wall Street Journal, "For GE Chief Immelt, Stock Options Are a Thing of the Past," September 18, 2003, Pages B1 and B3). Correspondingly, how to update the accounting treatment for various SBC packages has been drawing increased public attention, particularly since the early 1990s.

This study examines the price performance of the US stock market when the Financial Accounting Standards Board (FASB) announces updates of US GAAP that concern firms' financial statement disclosures of their employees' SBC. Existing studies have largely focused on the interim or long-term association between stock price and stock option expense, yet few published works have examined the possible instant wealth effects associated with the pronouncements of employee stock option (ESO) accounting changes. Do the shifts in the disclosure environment regarding firms' stock options cause any new "information shocks" that might materially affect the investing public's valuation of equities of firms affected by SBC accounting changes?

Our work investigates a time frame that ranges from mid-1993 to mid-2004, in which the FASB struggled to develop and adopt Statement of Financial Accounting Standard (SFAS) No. 123 and later amended it with SFAS No. 148. While the FASB was experiencing difficulties in finalizing its requirements, the International Accounting Standards Board (IASB) experienced more success by issuing International Financial Reporting Standard (IFRS) No. 2 in less time and with much less opposition.

RECENT SBC ACCOUNTING DEVELOPMENT

During the development of SFAS 123 in the early 1990s, the FASB was constantly pressured by the competing interests of the investing public (e.g., Warren Buffet), of ESO-granting industries and firms (e.g., Silicon Valley Coalition and the American Electronic Association), of reporting practitioners (e.g., The Big Six public accounting firms), and of the US Congress (e.g., U.S. House of Representatives). The investing public was concerned about the high corporate compensation paid to top executives that was not justified by the firm performance. ESO-granting industries and firms felt the only way they could attract and retain top management talent was by the use of ESO. Due to the effective lobbying of business executives, the US House of Representatives got directly involved and reversed the accounting regulators.

Young (1997) and Miller, Redding and Bahnson (1998) describe in detail the due process of SFAS 123, which eventually lead to FASB's compromise solution to "encourage, rather than require, recognition of compensation cost based on a fair value method and pursue expanded disclosures." (SFAS 123, Paragraph 378) "The Board chose a disclosure-based solution for stock-based employee compensation to bring closure to the divisive debate on this issue 3/4 not because it believes that solution is the best way to improve financial accounting and reporting." (SFAS 123, Paragraph 62)

The SBC accounting issue faded away but did not die. Public concern grew dramatically following the stock market decline and a series of corporate financial scandals that occurred in the early 2000s. Investors blamed the existing financial accounting practices, which include SBC reporting rules, for being ineffective. According to Hitt and Schlesinger (2002), "In 2000, Enron issued stock options worth $155 million, according to a common method of valuing options. Had accounting rules forced the company to deduct the cost of those options from its 2000 profit, according to New York brokerage firm Bear Stearns Cos., Enron's operating profit for the year would have been 8% lower, even before Enron made its drastic restatement of earnings several months ago. But current rules require companies to report the cost of issuing options only as a footnote in their annual reports.

Out of the stocks in the Standard and Poor's 500, only two companies 3/4 Boeing Co. and Winn-Dixie Stores Inc. 3/4 have chosen to count stock options as an expense in their financial reports."

The FASB picked up the momentum by issuing an exposure draft in October 2002 to amend SFAS 123, and without any significant opposition from the business community, the proposal was developed into SFAS 148 two months later. The new standard provided alternative methods of transition for a voluntary change to the fair-value-based method of accounting for SBC. It also required "prominent disclosures in both annual and interim financial statements" about the method of SBC reporting and the effect on reported results.

On the other hand, the IASB made steady progress in developing its international standard for SBC accounting. The board introduced a discussion paper in July 2000, voted to build an SBC accounting standard in July 2001, openly invited comments from the international business community in September 2001, published a related exposure draft in November 2002, and issued the final standard (IFRS 2, "Share-Based Payment") in February 2004. Unlike SFAS 123 and 148, IFRS 2 explicitly requires "an entity to reflect in its profit/loss and financial position the effects of share-based payment transactions, including expenses associated with share options granted to employees." The new standard took effect beginning on January 1, 2005.

Feeling the pressure from IASB's accomplishment, the FASB attempted to reestablish its plan for SBC accounting changes. In March 2004 (one month after the issuance of IFAS 2), the FASB published an exposure draft, specifying: "The Board believes that this proposed Statement addresses users' and other parties' concerns by requiring enterprises to recognize an expense in the income statement for employee services received (and consumed) in exchange for the enterprises' equity instruments.... By requiring the fair-value-based method for all public companies, this proposed Statement would eliminate an alternative accounting method.... Finally, requiring the use of fair-value-based method is convergent with IFRS 2." However, once again the political opposition and intervention grew swiftly, with the climax being that in July 2004, the U.S. House of Representatives voted overwhelmingly to pass legislation, "The Stock Options Accounting Reform Act," which specifically prohibits the FASB from mandating the deduction of most ESO as expenses.

LITERATURE REVIEW

Even though policy makers strive to update GAAP and provide investors with transparent accounting information, whether and how the changes in a specific accounting rule affect a reporting firm's market value remains an open question. Some major changes in managerial accounting systems, such as activity-based costing (ABC) adoptions in the US, do not cause significant stock market reactions (e.g., Gordon & Silvester, 1999). As for financial accounting changes, existing evidence is mixed concerning whether the issuance and adoption of a more "transparent" reporting standard will cause negative or positive wealth effects. One hypothesis assumes that more accounting disclosure brings "bad news" or "negative shocks" to the market, causing investors to re-evaluate firm liabilities, expenses and net profits, and then adjust their estimate of stock value downwards. The opposite hypothesis predicts that more accounting disclosure should benefit the investing public with increased transparency regarding firms' financial fundamentals, thus reaffirming investors' confidence and boosting stock performance.

Kren and Leauby (2001) found that stock prices reacted negatively to the issuance of SFAS 106 that requires the accounting for postretirement benefits other than pensions. Cornett, Rezaee and Tehranian (1996) examined the impact of twenty-three pronouncements related to the proposed fair value accounting rules on stock prices of financial institutions, and found that pronouncements signaling an increased (decreased) likelihood of new rule enactment caused negative (positive) abnormal price reactions.

On the other hand, Brown and Thapa's (2003) event-study found that S&P 500 firms' stocks on average responded positively to the final adoption of SFAS 133, which requires firms to record derivatives as assets and/or liabilities and to expense them. Bin, Branson and Chen (2004) found evidence of a positive valuation impact on firm values when the FASB announced a series of derivative accounting updates, which include the issuances of exposure drafts (ED) and final standards related to SFAS 119, 133, 137, 138 and 149. It appears to us that although new or proposed GAAP updates generally aim to improve reporting transparency, the sign and/or magnitude of valuation impact of such accounting changes are firm, industry or rule-specific.

Numerous empirical studies have also been conducted to examine the wealth effects of SBC accounting changes. Many firms oppose such changes because they fear that further disclosure of SBC in their financial statements, particularly the recognition of SBC as an operating expense (labor resource costs), will negatively affect their reported earnings and equity values. However, since a firm's SBC functions to stimulate employees for better future performance and to reduce potential agency problems, the disclosure and recognition of SBC could instead cause positive signaling effects to the investors. The improved disclosure could result in an upward adjustment of a firm's future earnings prospects and stock price.

Yermack (1997) found that firms tend to grant stock option awards to their CEOs when the favorable corporate news becomes imminent, implying such options are issued when their economic benefits to the issuing firms outweigh their costs. Aboody, Barth and Kasznik (2003) and Li (2002) document that on average 1) a firm's stock price is negatively correlated with its outstanding ESO intrinsic values and expected ESO expenses; 2) the stock price reacts negatively to an increase in ESO expenses disclosed under SFAS 123 around firms' 10-K filings with the SEC; and 3) the predicted future earnings are positively associated with its decision to voluntarily expense ESO in accordance with SFAS 123. Bell et. al. (2002) indicate that for profitable computer software companies, the US stock market treated their ESO favorably as "intangible assets" rather than "expenses".

Daniel, Kale and Naveen (2003) and Elayan, Pukthuanthong and Roll (2004) found that during the 2002-2003 period, US firms deciding to expense their ESO on average experienced a significant stock price gain during a six-day window around the pronouncement. At the same time, their industry/size/performance-matched counterparts suffered a significant wealth loss, implying that the market favors transparent accounting while penalizing evasive reporting.

Dechow, Hutton and Sloan (1996) concentrated their study on the stock price performance related to FASB's due process for developing SFAS 123. Three relevant dates were selected for their event studies: 1) the FASB voted to propose the required expensing of employee stock options; 2) the FASB issued the exposure draft; and 3) the FASB voted to drop the mandatory option expensing proposal. Also they focused on three specific sample groups: (i) firms in industries that intensively issue ESO; (ii) firms in the biotechnology industry; and (iii) firms that submit comment letters to protest FASB's ESO expensing proposal. Dechow, Hutton and Sloan (1996) claim "opposition to expensing ESO is concentrated in firms that use options extensively for top executives rather than in firms with high overall levels of option usage." However, they found no significant stock price reactions to the announcement events for those three sample groups of firms, implying that the investors do not consider these FASB actions as informative or value-relevant.

Existing studies examine both the US and foreign equity markets for possible valuation effects of accounting information. A firm's financial decisions, such as to issue its equity in a foreign market, could be significantly affected by the accounting disclosure environment. Findings suggest that foreign firm values might also be sensitive to the accounting practices that they employ. The US stock market includes not only "domestic" American firm equities but also "foreign" non-American company shares that are issued and traded within the US, such as American Depository Receipts (ADRs). Foreign companies that desire US capital have become increasingly inclined to conform to US GAAP when reporting their earnings. On the other hand, American firms listed in foreign markets are subjected to foreign or international GAAP, including those issued by the IASB. Some American firms listed in the US might be indirectly influenced by the IASB accounting progress, which inevitably exerts pressure on the FASB for further improvements.

We hypothesize that both FASB's and ISAB's extended requirements in SBC accounting transparency are likely to materially affect equity values of both American companies and ADR-issuing foreign firms. Yet, no published works have examined the wealth effects of SBC accounting disclosure on the ADR market. Our study attempts to fill in this gap by investigating the price reactions of both American equities and ADRs to some of the 1993-2004 FASB and ISAB developments. Selected events are summarized in Table 1, and the event dates are collected from the Wall Street Journal (WSJ) Index, the FASB publication, "Financial Accounting Series: Exposure Drafts," and various web sources (e.g., http://www.fasb.org/news/newspg.shtml; http://www.isag.org/news/).

DATA AND METHODOLOGY

Time series of equity portfolio daily returns are pre-categorized by industry (and other criteria) in Yahoo! Finance website (http://finance.yahoo.com/indices) and can be directly downloaded from its "Historical Prices" section. Other data in this study were obtained from: (i) Returns for the US market portfolio benchmark are obtained from the Center for Research in Security Prices (CRSP) database; (ii) The data of S&P-ADR Index, as the proxy for foreign firms that are fully bound by US GAAP, is obtained from Standard and Poor's which introduced this index on January 1, 1998; (iii) As for foreign firms that are only required to meet minimal US GAAP compliance, we screened the online database of ADR programs sponsored by the Bank of New York (http://www.adrbny.com) and then obtained 28 Level-I ADRs which originated no later than January 1, 1998 and for which a complete trading history was available. The daily closing price data of these Level-I ADRs were downloaded from the "Historical Prices" section of the Yahoo! Finance online database, and then weighted into daily portfolio returns based on their market capitalizations. Descriptive statistics of daily returns for various equity portfolios are presented in Table 2.

To estimate the stock price impact of FASB's or ISAB's SBC accounting change pronouncements, we employed a Multivariate Regression Model similar to those in Dechow, Hutton and Sloan (1996). This model is built upon a system of portfolio return equations for multiple events:

[R.sub.j,t] = [a.sub.j] + [b.sub.1j] [R.sub.m,t-2] + [b.sub.2j] [R.sup.m,t-1] + [b.sup.3j] [R.sub.m,t] + [b.sub.4j] [R.sub.m,t+1] + [b.sub.5j] [R.sub.m,t+2] + [K.summation over (k=1)] [c.sub.kj] [D.sub.j,t+] [e.sub.j,t,] (1).

where [R.sub.j,t] = the return on the jth equity portfolio on day t;

[R.sub.m,t-2] ~ [R.sub.m,t+2] = the return on the CRSP equally-weighted index on day t - 2 through t + 2, respectively;

[a.sub.j] = an intercept coefficient for the jth portfolio;

[b.sub.1j] ~ [b.sub.5j] = market risk coefficients for the jth portfolio;

[c.sub.kj] = the price reaction of the kth event on the jth portfolio (k = 1, 2, ..., K for the development process in each accounting standard, corresponding to the dates of board voting, exposure draft issuance, final standard publication, and/or announced political intervention, respectively);

[D.sub.k,t] = dummy variable, equal to 1 during the period of the kth event and 0 otherwise;

[e.sub.j,t] = normally distributed error terms in the jth equation.

To circumvent problems associated with asymmetry in return distributions, daily returns are in the logarithm form ln[P.sub.t] - ln[P.sub.t-1]. Contemporaneous market return [R.sub.m,t] is employed to adjust for each equity sample's systematic risk, while lead and lag market returns are also added as explanatory variables to reduce the errors associated with non-synchronous trading. For portfolio j, the value of event-date dummy coefficient ([c.sub.kj]) is estimated by the Seemingly Unrelated Regression (SUR) method, which takes into account contemporaneous covariance.

The cross-section market-adjusted performance of twenty-one equity portfolios with different firm and industry specific characteristics were jointly estimated using daily returns series over trading days beginning 120 days prior to the board voting for a newly proposed SBC accounting update. We tested the following hypotheses:

H0: [c.sub.kj] = 0 across j; the abnormal return for portfolio j equals zero surrounding event k. The stock market does not react significantly to the announcement of event k. (2a)

Ha: [c.sub.kj] [not equal to] 0 across j; the stock market does react significantly to the announcement of event k. (2b)

For testing similar hypotheses, a large-sample SUR model typically uses an asymptotic t-test to measure the statistical significance of abnormal return coefficient [c.sub.kj.]

REGRESSION RESULTS

We expected that pronouncements which signal an increased (decreased) likelihood of a new rule enactment should cause negative (positive) abnormal price reactions, especially for technology firms. Cornett, Rezaee and Tehranian (1996) found bank stock performance to be associated with proposed fair-value accounting updates. The SUR estimates presented in Tables 3a and 3b, however, indicate that stock prices for all sample portfolios do not significantly react to the FASB's issuance of SFAS 123 (Events I, V and VI) , SFAS 148 (Event XI) or their respective preceding EDs (Events II and X). No statistically significant abnormal returns were identified surrounding the announcement dates of those accounting change events. Moreover, as Table 3c indicates, in 2004 when the FASB announced its new plan of further SBC accounting developments by issuing a new ED that requires SBC expensing (Event XIII), still none of the twenty equity portfolio indices exhibited significant price reactions. These results held regardless of firm size (Russell 1000, Russell 2000), domesticity (S&P 500, S&P ADRs, Level-1 ADRs), exchange-listing requirements (NYSE Composite, NASDAQ Composite), or industry categories (Industrials, Utilities, Financials, Technology, etc.). Our findings on such a broad range of firms surrounding a variety of not only US but also international SBC accounting policy updates are consistent with Dechow, Hutton and Sloan's (1996) findings.

There were no significant stock price reactions to FASB's specific development process of SFAS 123 even for firms that have a tendency to issue employees' stock options. It appears to us that investors do not generally consider these FASB accounting policy changes as informative or value-relevant. Either the market has already anticipated the occurrences of such accounting changes and incorporated them into prices prior to announcements, or because the market merely regards the proposed changes as "neutral," i.e., the negative and positive wealth effects of SBC disclosure (operating expense increase vs. agency cost reduction) could cancel each other.

Although most of the observed abnormal returns are statistically insignificant, we still find some interesting phenomena:

1) When SFAS 123 and its preceding ED are issued by the FASB, only utility firms have positive abnormal returns for the day on which the FASB introduces the ED (Table 3a, Event II), and only transportation and computer firms exhibit positive abnormal returns for the day on which the final standard is published (Table 3a, Event VI). The majority of portfolio indices experience value losses surrounding those FASB actions, even though they are statistically insignificant at the 0.10 level.

2) About seven years later, however, most of those indices gain slightly in their values when SFAS 148 and its preceding ED are issued. Surrounding the ED issuance (Table 3b, Event X), all portfolios except "utilities" and "transportations" indices show positive abnormal returns. Surrounding the final standard publication (Table 3b, Event XI), all portfolios except Level-1 ADRs, industrial and transportation firms yield positive abnormal returns. Moreover, when the FASB makes a new attempt at SBC accounting changes by issuing a new ED in March 2004 (Table 3c, Event XIII), all sample portfolios but transportation firms show insignificant price gains. The gains ranged from 0.079 percent for Semiconductor stocks to 0.717 percent for S&P ADRs. This suggests, although not strongly, that investors' concern for and favor of SBC accounting transparency has increased slightly. This could be due to the corporate financial scandals that occurred in the early 2000s.

3) The international community has led the way in SBC accounting by the introduction of IFRS 2 by the IASB between 2001 and 2004. The price reactions in US stock market to this development are mixed; most of the equity portfolio indices do not have a significant abnormal return. However, the foreign-based ADR-issuing firms yield significant price gains for the day on which the final standard is issued (Table 3b, Event XII). S&P ADRs and Level-1 ADRs on average earn 1.323 percent (significant at the 0.05 level) and 0.947 percent (significant at the 0.10 level), respectively. It appears to us that the enhanced SBC accounting transparency in foreign countries has made their equities more attractive to US investors.

4) Somehow, ironically, while the market remains generally insensitive to an FASB SBC decision announcement, investors appear to react when politicians intervene by proposing legislative action against FASB's independence on the SBC accounting policy issues. The introduction of "Accounting Standards Reform Act" in October 1994 (Table 3a, Event IV) caused an observable value loss on several of the portfolio indices, including Russell 2000 (-1.061 percent), Pacific Exchange Technology (-0.892 percent) and Philadelphia Semiconductor (-1.214 percent). Investors seem to be particularly sensitive to reporting transparency in technology sectors in which the SBC method is heavily relied upon for attracting management talent.

In July 2004, with the House passing the "Stock Options Accounting Reform Act," the US Congress took new legislative action to overcome FASB's efforts in SBC accounting changes (Table 3c, Event XIV). The stock market did not respond favorably to Congress' attempt to "save the Corporation America from the FASB." Instead, nearly all of the twenty equity indices showed negative abnormal returns on the announcement day, with Biotech, Pacifica Exchange Technology and Philadelphia Semiconductor losing 1.391 percent, 0.860 percent and 0.999 percent, respectively (significant at the 0.05-0.10 level). The only exceptions were the ADR-issuing firms, with S&P ADRs gaining 1.265 percent (significant at the 0.05 level) and Level-1 ADRs gaining 0.382 percent, insignificant at the 0.10 level). One possible explanation is that many foreign-based ADRs, subject to the new IFAS 2's SBC accounting transparency requirement in their home countries, become relatively more attractive to investors who were disappointed by the US Congress' "politics" that put corporative interests above the investing public's right to know.

SUMMARY

Our study examines the price performance of various equity portfolios traded in the US stock market when the FASB and the IASB announce their newest developments in the reporting requirements for corporate stock-based compensation. Our findings indicate that the US stock market in general reacted negatively to the issuance of SFAS 123 and its preceding exposure draft, but the observed abnormal returns were insignificant. SFAS 148, and a new exposure draft issued in 2004, both of which amend SFAS 123, generally caused positive but insignificant pronouncement effects. The insignificance of price reactions to SFAS or ED issuance is not sensitive to a firm's size, domesticity, disclosure requirement, exchange-listing regulation or industry sector.

Our findings, are consistent with the findings of Dechow, Hutton and Sloan (1996) who looked only at SFAS 123 However, we go beyond Dechow, Hutton and Sloan (1996) by finding that when the US Congress takes legislative action threatening FASB's independence and authority on SBC accounting policy issues, the stock market reacts unfavorably. The exception is foreign-based ADR-issuing firms which are regulated by the more transparent SBC accounting rules (e.g., IFAS 2) in their home countries. The investing public might not (yet) appreciate FASB or IASB's efforts to improving SBC accounting transparency, but it appears to us that they appreciate Congressional intervention even less.

REFERENCES

Aboody, D., M. E. Barth & R. Kasznik (2003). Stock-based employee compensation and equity market values. Unpublished working paper, Stanford University.

Bell, T. B., W. R. Landsman, B. L. Miller & S. Yeh (2002). The valuation implications of employee stock option accounting for profitable computer software firms. The Accounting Review, 77 (4), 971-996.

Bin, F. S., L. Branson & D. H. Chen (2004). Derivative accounting changes and equity market reactions. Journal of Accounting and Finance Research, 12 (7), 85-99.

Brown, C. L. & S. B. Thapa (2003). The shareholder wealth effects of FASB statement No. 133: Accounting for derivatives and hedging. Journal of Accounting and Finance Research, 11 (3), 82-86.

Daniel, N., J. Kale & L. Naveen (2003). Do option expensing announcements convey information to the stock market? Unpublished working paper, DePaul University.

Dechow, P., A. Hutton & R. Sloan (1996). Economic consequences of accounting for stock-based compensation. Journal of Accounting Research, 34 (1), 1-20.

Elayan, F. A., K. Pukthuanthong & R. Roll (2004). To expense or not to expense employee stock options: The market reaction. Unpublished working paper, UCLA.

Gordon, L. A. & K. J. Silvester (1999). Stock market reactions to activity-based costing adoptions. Journal of Accounting and Public Policy, 18 (3), 229-251.

Hitt, G. & J. M. Schlesinger (2002, March 26). Stock options come under fire in the wake of Enron's collapse. The Wall Street Journal, A1.

Kren, L. & B. A. Leauby (2001). The effect of SFAS 106 on chief executive compensation. Advances in Public Interest Accounting, 8 (1), 143-167.

Langer, R. & B. Lev (1993). The FASB's policy of extended adoption for new standards: An examination of FAS No. 87. The Accounting Review, 68 (3), 513-533.

Li, H. (2002). Employee stock options, residual income valuation and stock price reaction to SFAS 123 footnote disclosures. Unpublished working paper, University of Iowa.

Miller, P., R. J. Redding & P. R. Bahnson (1998). The FASB: The people, the process, and the politics (Fourth Edition), Irwin-McGraw Hill.

The Wall Street Journal (2003, September 18). For GE chief Immelt, stock options are a thing of the past, B1-B3.

Yermack, D (1997). Good timing: CEO stock option rewards and company news announcements. Journal of Finance, 52 (2), 449-476.

Young, J. J. (1997). Accounting as it intertwines with the politics: The case of accounting for stock compensation. Unpublished working paper, University of New Mexico.

Feng-Shun (Leo) Bin, University of Illinois at Springfield

Leonard Branson, University of Illinois at Springfield

Dar-Hsin Chen, National Taipei University

Table 1: Stock-Based Compensation Accounting Update Events Studied

Event Date Description

 The FASB voted and decided new rules
 I. April 26, 1993 should be developed to account for
 stock-based employee compensation.

 The FASB issued an exposure draft,
 which proposed that companies be
 II. June 30, 1993 required to report SBC at fair value
 and recognize SBC as an expense in
 their financial statements.

 The US Senate passed (88-to-9) a
III. May 3, 1994 non-binding resolution calling for
 the FASB to withdraw the options
 expensing plan.

 A coalition led by Senator Joseph
 IV. October 6, 1994 Lieberman introduced the "Accounting
 Standards Reform Act," proposing that
 all new accounting changes need
 affirmative approval from the SEC.

 The FASB voted (5-to-2) and decided
 V. December 14, 1994 to compromise, announcing a modified
 version of new SBC standard.

 The FASB published SFAS 123, "Accounting
 VI. October 11, 1995 for Stock-Based Compensation," which
 required footnote disclosure of employee
 stock options outstanding but did not
 mandate expensing them.

 Federal Reserve chairman Alan Greenspan
 openly expressed his concern about the
VII. August 27, 1999 high-flying overpriced stock market. He
 specifically remarked that overestimate
 of earnings occurred "as a result of
 the distortion in the accounting for
 stock options", which included "not
 charging their fair value against income."

VIII. July 31, 2001 The IASB voted for developing an
 international standard for SBC accounting.

 The IASB issued an exposure draft, which
 IX. November 7, 2002 proposed that companies be required
 to account for all share-based payments
 at fair value and recognize them as
 an expense.

 X. October 4, 2002 The FASB issued an exposure draft,
 which proposed an amendment of SFAS 123.

 The FASB published SFAS 148, "Accounting
 for Stock-Based Compensation--Transition
 and Disclosure--an amendment of FASB
 XI. December 31, 2002 Statement No. 123." The new standard
 provides alternative methods of
 transition for a voluntary change to
 the fair-value-based method of
 accounting for SBC, and it also requires
 prominent disclosures in both annual and
 interim financial statements about the
 method of SBC reporting and the effect
 on reported results.

 The IASB published IFRS 2, "Share-Based
XII. February 19, 2004 Payment," requiring an entity to reflect
 in its profit/loss and financial position
 the effects of share-based payment
 transactions, including expenses
 associated with share options granted
 to employees.

 The FASB issued an exposure draft,
XIII. March 31, 2004 Share-Based Paymentan amendment of FASB
 Statements No. 123 and 95," which
 generally would require that SBC
 transactions be accounted for at fair
 values and recognized as an expense.

 The US House of Representatives passed
 (312-to-111) the "Stock Options Accounting
XIV. July 20, 2004 Reform Act." Companies would be required
 to expense only stock options granted to
 the top five executives, with exemptions
 for small businesses and companies within
 three years of an initial public offering.

Table 2: Summary Statistics of Daily Returns on Various
Equity Portfolio Indices

 Collected
Index Portfolio Time Series Mean (%) S.D. (%)

CRSP Value-Weighted 01/01/92-
 12/31/2003 0.143 1.012

Russell 1000 12/10/92-
 12/31/03 0.127 0.945

Russell 2000 01/01/92-
 12/31/03 0.316 2.376

S&P 500 01/01/92-
 12/31/03 0.133 1.298

S&P ADR 01/01/98-
(Level-2&3) 12/31/2003 0.180 1.126

Level-1 ADR 01/01/98-
 12/31/2003 0.126 1.643

NYSE Composite 01/01/92-
 12/31/03 0.160 1.333

NASDAQ Composite 01/01/92-
 12/31/03 0.191 1.958

Industrials (NASDAQ) 01/01/92-
 12/31/2003 0.240 2.325

Utilities (NYSE) 01/01/92-
 12/31/2003 0.114 1.191

Transportation 01/01/92-
 12/31/03 0.087 1.693
(NASDAQ)
Banks (NASDAQ) 01/01/92-
 12/31/03 0.224 1.993

Insurance (NASDAQ) 01/01/92-
 12/31/03 0.198 2.102

Biotech (NASDAQ) 11/01/93-
 12/31/03 0.325 3.420

Computers (NASDAQ) 11/01/93-
 12/31/03 0.256 2.423

Telecom (NASDAQ) 05/13/96-
 12/31/03 0.289 3.095

Internet (AMEX) 10/04/95-
 12/31/03 0.306 3.149

Networking (AMEX) 10/21/94-
 12/31/03 0.293 2.644

Pacific Exchange 01/01/92-
Technology 12/31/03 0.275 2.158

Philadelphia 01/01/92-
Semiconductor 12/31/03 0.317 3.010

 Minimum Maximum
Index Portfolio (%) (%) Kurtosis

CRSP Value-Weighted -3.438 4.220 4.750

Russell 1000 -3.105 4.949 3.990

Russell 2000 -4.420 6.267 5.476

S&P 500 -2.740 5.640 4.791

S&P ADR
(Level-2&3) -2.855 7.046 4.946

Level-1 ADR -3.510 6.134 6.428

NYSE Composite -2.309 2.765 2.848

NASDAQ Composite -5.156 5.220 6.505

Industrials (NASDAQ) -3.420 6.293 6.663

Utilities (NYSE) -1.940 3.017 4.852

Transportation -1.741 2.185 3.005

(NASDAQ)
Banks (NASDAQ) -2.319 4.550 5.023

Insurance (NASDAQ) -4.562 3.039 3.675

Biotech (NASDAQ) -6.292 5.078 4.854

Computers (NASDAQ) -3.365 4.805 2.947

Telecom (NASDAQ) -3.102 5.222 2.729

Internet (AMEX) -4.820 4.173 6.108

Networking (AMEX) -3.927 3.100 5.226

Pacific Exchange
Technology -3.464 4.475 3.103

Philadelphia
Semiconductor -4.023 3.982 4.016

Index Portfolio Skewness

CRSP Value-Weighted 0.629

Russell 1000 0.109

Russell 2000 0.378

S&P 500 0.433

S&P ADR
(Level-2&3) 0.490

Level-1 ADR 0.592

NYSE Composite 0.113

NASDAQ Composite 0.059

Industrials (NASDAQ) 0.420

Utilities (NYSE) 0.097

Transportation 0.269

(NASDAQ)
Banks (NASDAQ) 0.338

Insurance (NASDAQ) -0.159

Biotech (NASDAQ) -0.375

Computers (NASDAQ) 0.264

Telecom (NASDAQ) 0.861

Internet (AMEX) -0.090

Networking (AMEX) -0.355

Pacific Exchange
Technology 0.264

Philadelphia
Semiconductor -0.630

Note: The return for Day t is in the natural logarithm
form ln[P.sub.t] - ln[P.sub.t-1].

Table 3a: Test of Hypothesis that the Abnormal Return
for Each Equity Portfolio Equals Zero Surrounding each
Event Announcement related to SFAS 123

Panel A: Portfolio AR Events related to SFAS 123
(in %)

 Event I Event II

 Russell 1000 -0.425 -0.338
 (0.396) (0.695)

 Russell 2000 0.268 -0.612
 (0.613) (0.316)

 S&P 500 -0.219 -0.359
 (0.557) (0.213)

 S&P ADR n.a. n.a.

 Level-1 ADR n.a. n.a.

 NYSE Composite -0.317 -0.224
 (0.482) (0.786)

 NASDAQ Composite -0.153 -0.435
 (0.675) (0.800)

 Industrials (NASDAQ) -0.211 -0.508
 (0.600) (0.331)

 Utilities (NYSE) -0.528 0.226
 (0.286) (0.877)

 Transportation (NASDAQ) 0.434 -0.177
 (0.328) (0.638)

 Banks (NASDAQ) -0.235 -0.284
 (0.574) (0.767)

 Insurance (NASDAQ) 0.097 -0.584
 (0.735) (0.513)

 Biotech (NASDAQ) n.a. n.a.

 Computers (NASDAQ) n.a. n.a.

 Telecom (NASDAQ) n.a. n.a.

 Internet (AMEX) n.a. n.a.

 Networking (AMEX) n.a. n.a.

 Technology (Pacific -0.369 -0.622
 Exchange) (0.714) (0.246)

 Semiconductor
 (Philadelphia) n.a. n.a.

Panel B: Wald Test 5.848 3.950
[c.sup.2]-value (0.492) (0.266)

Panel A: Portfolio AR Events related to SFAS 123
(in %)

 Event III Event IV

 Russell 1000 -0.064 -0.729
 (0.814) (0.153)

 Russell 2000 -0.376 -1.061
 (0.571) (0.088) *

 S&P 500 0.166 -0.685
 (0.799) (0.181)

 S&P ADR n.a. n.a.

 Level-1 ADR n.a. n.a.

 NYSE Composite 0.562 -0.636
 (0.206) (0.257)

 NASDAQ Composite -0.625 -0.840
 (0.255) (0.113)

 Industrials (NASDAQ) 0.056 -0.255
 (0.875) (0.466)

 Utilities (NYSE) -0.353 -0.412
 (0.426) (0.308)

 Transportation (NASDAQ) -0.151 0.071
 (0.712) (0.849)

 Banks (NASDAQ) -0.220 -0.488
 (0.364) (0.312)

 Insurance (NASDAQ) 0.348 -0.563
 (0.765) (0.417)

 Biotech (NASDAQ) 0.271 -0.555
 (0.566) (0.244)

 Computers (NASDAQ) 0.640 -0.038
 (0.431) (0.881)

 Telecom (NASDAQ) n.a. n.a.

 Internet (AMEX) n.a. n.a.

 Networking (AMEX) n.a. n.a.

 Technology (Pacific 0.032 -0.892
 Exchange) (0.893) (0.095) *

 Semiconductor -1.214
 (Philadelphia) n.a. (0.062) *

Panel B: Wald Test 7.011 4.427
[c.sup.2]-value (0.183) (0.343)

Panel A: Portfolio AR Events related to SFAS 123
(in %)

 Event V Event VI

 Russell 1000 -0.052 -0.193
 (0.854) (0.702)

 Russell 2000 -0.140 0.708
 (0.842) (0.162)

 S&P 500 -0.618 -0.124
 (0.300) (0.734)

 S&P ADR n.a. n.a.

 Level-1 ADR n.a. n.a.

 NYSE Composite -0.069 -0.244
 (0.840) (0.525)

 NASDAQ Composite 0.133 -0.568
 (0.640) (0.393)

 Industrials (NASDAQ) -0.063 -0.257
 (0.844) (0.304)

 Utilities (NYSE) -0.184 -0.406
 (0.577) (0.284)

 Transportation (NASDAQ) -0.306 0.252
 (0.482) (0.639)

 Banks (NASDAQ) 0.451 -0.509
 (0.701) (0.411)

 Insurance (NASDAQ) -0.527 -0.725
 (0.375) (0.430)

 Biotech (NASDAQ) 0.498 -0.112
 (0.280) (0.318)

 Computers (NASDAQ) -0.615 0.051
 (0.309) (0.782)

 Telecom (NASDAQ) n.a. n.a.

 Internet (AMEX) n.a. n.a.

 Networking (AMEX) 0.376 -0.194
 (0.686) (0.878)

 Technology (Pacific -0.007 -0.459
 Exchange) (0.942) (0.720)

 Semiconductor 0.359 -0.466
 (Philadelphia) (0.479) (0.318)

Panel B: Wald Test 3.572 5.110
[c.sup.2]-value (0.408) (0.278)

Table 3b: Test of Hypothesis that the Abnormal Return
for Each Equity Portfolio Equals Zero Surrounding
each Event Announcement related to SFAS 148 and IFRS 2

Panel A: Portfolio Events related to SFAS 148
AR (in %)
 Event VII Event X Event XI

 Russell 1000 -0.298 0.310 0.162
 (0.600) (0.459) (0.804)

 Russell 2000 -0.784 0.653 0.714
 (0.087) * (0.410) (0.205)

 S&P 500 -0.733 0.128 0.264
 (0.295) (0.681) (0.530)

 S&P ADR -0.475 0.273 0.366
 (0.262) (0.495) (0.435)

 Level-1 ADR -0.185 0.641 -0.030
 (0.372) (0.366) (0.723)

 NYSE Composite 0.226 0.465 0.285
 (0.632) (0.347) (0.666)

 NASDAQ Composite -0.903 0.118 0.471
 (0.082) * (0.806) (0.604)

 Industrials -0.523 0.320 -0.086
 (NASDAQ) (0.177) (0.547) (0.622)

 Utilities (NYSE) -0.231 -0.052 0.080
 (0.529) (0.784) (0.719)

 Transportation -0.208 -0.020 -0.074
 (NASDAQ) (0.711) (0.802) (0.859)

 Banks (NASDAQ) -0.524 0.388 0.512
 (0.162) (0.561) (0.429)

 Insurance (NASDAQ) -0.309 0.280 0.250
 (0.271) (0.455) (0.683)

 Biotech (NASDAQ) -1.020 0.528 0.486
 (0.048) ** (0.660) (0.293)

 Computers (NASDAQ) -0.523 0.673 0.419
 (0.302) (0.295) (0.214)

 Telecom (NASDAQ) -0.660 0.720 0.380
 (0.153) (0.168) (0.627)

 Internet (AMEX) -0.754 0.718 0.649
 (0.116) (0.204) (0.433)

 Networking (AMEX) -0.846 0.587 0.437
 (0.089) * (0.458) (0.391)

 Technology -0.790 0.841 0.656
 (Pacific Exchange) (0.093) * (0.132) (0.239)

 Semiconductor -0.929 0.615 0.402
 (Philadelphia) (0.038) ** (0.280) (0.496)

Panel B: Wald Test 14.220 6.835 5.824
[c.sup.2]-value (0.045) ** (0.496) (0.482)

Panel A: Portfolio Events related to IFRS 2
AR (in %)
 Event VIII Event IX Event XII

 Russell 1000 0.357 -0.586 -0.384
 (0.529) (0.275) (0.550)

 Russell 2000 -0.243 0.423 0.098
 (0.710) (0.350) (0.825)

 S&P 500 0.490 -0.555 -0.697
 (0.365) (0.231) (0.172)

 S&P ADR -0.127 0.630 1.323
 (0.801) (0.198) (0.040) **

 Level-1 ADR -0.300 0.329 0.947
 (0.523) (0.508) (0.075) *

 NYSE Composite -0.162 0.067 0.132
 (0.735) (0.923) (0.792)

 NASDAQ Composite 0.312 0.143 -0.143
 (0.545) (0.740) (0.765)

 Industrials 0.227 0.309 -0.275
 (NASDAQ) (0.735) (0.468) (0.633)

 Utilities (NYSE) 0.078 0.254 -0.153
 (0.856) (0.502) (0.802)

 Transportation -0.206 0.009 0.265
 (NASDAQ) (0.655) (0.976) (0.590)

 Banks (NASDAQ) 0.354 -0.085 -0.502
 (0.630) (0.855) (0.311)

 Insurance (NASDAQ) 0.290 0.251 0.175
 (0.535) (0.684) (0.744)

 Biotech (NASDAQ) -0.110 -0.253 -0.429
 (0.734) (0.444) (0.397)

 Computers (NASDAQ) 0.257 -0.200 0.032
 (0.699) (0.592) (0.925)

 Telecom (NASDAQ) 0.482 -0.224 -0.154
 (0.620) (0.620) (0.730)

 Internet (AMEX) 0.075 0.057 0.098
 (0.912) (0.881) (0.882)

 Networking (AMEX) -0.103 -0.290 -0.222
 (0.870) (0.625) (0.536)

 Technology 0.336 -0.437 -0.488
 (Pacific Exchange) (0.509) (0.265) (0.301)

 Semiconductor 0.128 -0.279 -0.359
 (Philadelphia) (0.707) (0.387) (0.464)

Panel B: Wald Test 3.127 6.037 10.253
[c.sup.2]-value (0.723) (0.409) (0.057) *

Table 3c: Test of Hypothesis that the Abnormal Return
for Each Equity Portfolio Equals Zero Surrounding
each Event related to FASB's 2004 Share-Based-Payment ED

Panel A: Portfolio Events related to FASB's
AR (in %) March 2004 ED

 Event XIII Event XIV

 Russell 1000 0.510 -0.433
 (0.348) (0.369)

 Russell 2000 0.195 -0.529
 (0.748) (0.208)

 S&P 500 0.663 -0.735
 (0.250) (0.126)

 S&P ADR 0.717 1.265
 (0.172) (0.026) **

 Level-1 ADR 0.368 0.382
 (0.510) (0.620)

 NYSE Composite 0.276 -0.453
 (0.523) (0.680)

 NASDAQ Composite 0.280 -0.688
 (0.542) (0.189)

 Industrials 0.162 -0.620
 (NASDAQ) (0.753) (-0.287)

 Utilities (NYSE) 0.024 -0.077
 (0.964) (0.826)

 Transportation -0.190 0.029
 (NASDAQ) (0.835) (0.962)

 Banks (NASDAQ) 0.285 -0.321
 (0.521) (0.555)

 Insurance (NASDAQ) 0.400 -0.120
 (0.422) (0.783)

 Biotech (NASDAQ) 0.186 -1.391
 (0.453) (0.038) **

 Computers (NASDAQ) 0.510 -0.544
 (0.337) (0.380)

 Telecom (NASDAQ) 0.329 -0.209
 (0.552) (0.612)

 Internet (AMEX) 0.133 -0.451
 (0.798) (0.493)

 Networking (AMEX) 0.286 -0.702
 (0.635) (0.130)

 Technology (Pacific 0.104 -0.860
 Exchange) (0.877) (0.046) **

 Semiconductor 0.079 -0.999
 (Philadelphia) (0.913) (0.084) *

Panel B: Wald Test 5.003 16.210
[c.sup.2]-value (0.492) (0.041) **

Notes for Tables 3a-3c:

(1) Coefficients are SUR estimates. (2) In parentheses are p-values.
(3) *, **, *** denotes significance at the 0.10, 0.05 and 0.01 level,
respectively. (4) "n.a." denotes the situation in which the
corresponding data is not available (e.g., some equity indices were
not yet introduced to the market for trading when an event occurred).