The employee bonuses used to be considered earnings distribution rather than an expense of the firm. In 2002, a new accounting rule requests all the public corporations to disclose the employee stock option (ESO) expenses in the footnotes. In addition, after January, 1, 2008, companies should recognize ESO in the income statement according to No.39 of ESO expense. The main purposes of this study are to investigate, after the change in the reporting region of ESO expense, whether (1) investors change their valuation assessment of the ESO expense (2) management manipulates option-pricing model assumptions to understate the stock option expense to a greater extent after No.39 become effective.
The samples were hand collected from Market Observation Post System (MOPS) and TEJ, mainly including high-tech firms in Taiwan from 2004 to 2009. After controlling firm’s growth potential, EPS and total assets, we examine whether employee stock option-based compensation is negatively associated with stock return. We also calculate option value that is determined based on No.39 and compare it with option value using firms’ disclosed input assumptions; the difference between them could result from the management’s attempt to manipulate input assumption to decrease the stock option expense.

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