Option Value of Cash | ScienceGate

We investigate whether footnote disclosures under Statement of Financial Accounting Standards (SFAS) No. 123 are managed in 1996, the first year that the disclosure was required. The 1996 phase-in of SFAS No. 123 provided firms with a unique opportunity to manipulate the pro forma disclosure in the initial years. SFAS No. 123 allows firms discretion in estimating the value of their stock option grants and in allocating that value across accounting periods. Although we find little evidence that firms manage the estimated value of their option grants, we find that firm-specific incentives affect how that value is allocated. Specifically, firms that provide high levels of either CEO compensation or stock option compensation relative to performance allocate a smaller proportion of the options' value to the 1996 pro forma expense, apparently to reduce criticism of that compensation. Small firms and firms that recently went public also allocate a smaller proportion of option value to the 1996 pro forma expense, apparently to increase perceptions of their profitability. We conjecture that firms were less likely to manage the value of the options granted than the allocation of that value in 1996 because the parameter estimates underlying the reported option value must be disclosed in the footnote, whereas the inputs to the allocation computation are not disclosed. These results, which suggest that firms manipulated pro forma stock option expense when their estimate choices cannot be observed, have implications for both standard setters and financial statement users. In particular, the FASB's current deliberations on the transition from footnote disclosure to income statement recognition for stock options should consider additional disclosures to minimize unobservable choices. More generally, the FASB may reduce potential manipulation by requiring expanded disclosures about the choices used in computing both pro forma and reported numbers.

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Audit Quality and the Market Value of Cash Holdings: The Case of Office-Level Auditor Industry Specialization

Auditing A Journal of Practice & Theory ◽

10.2308/ajpt-50903 ◽

2014 ◽

Vol 34 (2) ◽

pp. 27-57 ◽

Cited By ~ 13

Author(s):

Jeong-Bon Kim ◽

Jay Junghun Lee ◽

Jong Chool Park

Keyword(s):

Financial Reporting ◽

Firm Value ◽

Capital Investment ◽

Audit Quality ◽

Cash Holdings ◽

Market Value ◽

High Quality ◽

Value Of Cash ◽

Office Level ◽

Industry Specialist

SUMMARY This study investigates the monitoring role of high-quality auditors defined as office-level industry specialists in the stock market valuation of cash assets. We find that the market value of cash holdings is significantly higher for the client of an industry specialist auditor. The marginal value of cash is 34 cents higher for the client of a joint-industry specialist at both the national and city levels than for the client of a nonspecialist. We also find that cash holdings are more closely associated with capital investment and the market value of capital investment is significantly higher when the auditor is a joint-industry specialist. Moreover, we find that the value of cash increases significantly when the client changes its auditor to a joint-industry specialist. Our findings hold even after controlling for the client's governance efficacy and financial reporting quality. Our results provide new insight into the mechanism through which high-quality audits affect firm value: External audits facilitate shareholders' monitoring over managerial cash expenditures, thereby leading market participants to attach a higher value to cash holdings.

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Share pledging, payout policy, and the value of cash holdings

Journal of Empirical Finance ◽

10.1016/j.jempfin.2020.12.004 ◽

2021 ◽

Vol 61 ◽

pp. 18-33

Author(s):

Robin K. Chou ◽

Yu-Chun Wang ◽

J. Jimmy Yang

Keyword(s):

Cash Holdings ◽

Payout Policy ◽

Value Of Cash

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