Abstract
This study explores whether SFAS 39, which mandated expensing of equity-based compensation (EBC) causes an unexpected wealth reallocation between debtholders and shareholders. Through a structural framework under the economic measure, we theorize that mandatory EBC expensing affects the priority of free cash flow payment mechanisms and thereby transfers firm value to equity at the expense of debt. Based on 582 Taiwan listed firms over the period 2005–2010, we empirically find that a significant increase in equity value as a percentage of firm value for firms that were affected by EBC expensing rule, compared to firms that were not affected. The wealth transfer from debtholders to shareholders is more salient for heavy EBC users. We also document that firms with more intensive debtholder-shareholder conflicts experience a larger wealth transfer than their counterparts do. Overall, our analyses suggest that mandated expensing of EBC leads to a value transfer from debt to equity.
| Original language | English |
|---|---|
| Pages (from-to) | 78-93 |
| Number of pages | 16 |
| Journal | Pacific Basin Finance Journal |
| Volume | 46 |
| DOIs | |
| Publication status | Published - 2017 Dec 1 |
Fingerprint
All Science Journal Classification (ASJC) codes
- Finance
- Economics and Econometrics
Cite this
}
What lies beneath the implementation of expensing equity-based compensation? / Lin, Hsuan-Chu; Chen, Ren Raw; Chou, Ting-Kai; Long, Michael.
In: Pacific Basin Finance Journal, Vol. 46, 01.12.2017, p. 78-93.Research output: Contribution to journal › Article
TY - JOUR
T1 - What lies beneath the implementation of expensing equity-based compensation?
AU - Lin, Hsuan-Chu
AU - Chen, Ren Raw
AU - Chou, Ting-Kai
AU - Long, Michael
PY - 2017/12/1
Y1 - 2017/12/1
N2 - This study explores whether SFAS 39, which mandated expensing of equity-based compensation (EBC) causes an unexpected wealth reallocation between debtholders and shareholders. Through a structural framework under the economic measure, we theorize that mandatory EBC expensing affects the priority of free cash flow payment mechanisms and thereby transfers firm value to equity at the expense of debt. Based on 582 Taiwan listed firms over the period 2005–2010, we empirically find that a significant increase in equity value as a percentage of firm value for firms that were affected by EBC expensing rule, compared to firms that were not affected. The wealth transfer from debtholders to shareholders is more salient for heavy EBC users. We also document that firms with more intensive debtholder-shareholder conflicts experience a larger wealth transfer than their counterparts do. Overall, our analyses suggest that mandated expensing of EBC leads to a value transfer from debt to equity.
AB - This study explores whether SFAS 39, which mandated expensing of equity-based compensation (EBC) causes an unexpected wealth reallocation between debtholders and shareholders. Through a structural framework under the economic measure, we theorize that mandatory EBC expensing affects the priority of free cash flow payment mechanisms and thereby transfers firm value to equity at the expense of debt. Based on 582 Taiwan listed firms over the period 2005–2010, we empirically find that a significant increase in equity value as a percentage of firm value for firms that were affected by EBC expensing rule, compared to firms that were not affected. The wealth transfer from debtholders to shareholders is more salient for heavy EBC users. We also document that firms with more intensive debtholder-shareholder conflicts experience a larger wealth transfer than their counterparts do. Overall, our analyses suggest that mandated expensing of EBC leads to a value transfer from debt to equity.
UR - http://www.scopus.com/inward/record.url?scp=85033713413&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85033713413&partnerID=8YFLogxK
U2 - 10.1016/j.pacfin.2017.06.005
DO - 10.1016/j.pacfin.2017.06.005
M3 - Article
VL - 46
SP - 78
EP - 93
JO - Pacific Basin Finance Journal
JF - Pacific Basin Finance Journal
SN - 0927-538X
ER -