What lies beneath the implementation of expensing equity-based compensation?

Hsuan-Chu Lin, Ren Raw Chen, Ting-Kai Chou, Michael Long

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)78-93
Number of pages16
JournalPacific Basin Finance Journal
Volume46
DOIs
Publication statusPublished - 2017 Dec 1

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Equity
Shareholders
Firm value
Wealth transfer
Debt
Taiwan
Expenses
Free cash flow
Payment
Economics
Wealth
Reallocation
Value transfer

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

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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.",
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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 journalArticle

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