Impact of the Size of Board of Directors on Earnings Quality When Stock Options are Expensed under SFAS 123 (R)

• Published in: Delhi Business Review Vol. 16; no. 1; pp. 11 - 20
• Main Authors: Paz, Veronica, Maheshwari, Suneel, Tickell, Geoffrey
• Format: Journal Article
• Language: English
• Published: Rohini Society for Human Transformation & Research 03.01.2015
• Subjects: Accounting records; Accruals; Boards of directors; Chief executive officers; Conflicts of interest; Corporate governance; Earnings; Employees; Equity capital; Executive compensation; Fair value; Ownership; Stock options; Stockholders; Valuation
• ISSN: 0972-222X; 2277-7725
• DOI: 10.51768/dbr.v16i1.161201502

THE paper examines the association between the number of Board of Director (BOD) members and earnings quality when stock options are expensed under SFAS 123 (R) as part of CEO compensation. The paper analyzes the effect of expensing CEO Stock options on earnings quality when the BOD size serves as a mitigating variable. Data for the period of 2000-2009 was collected from three databases - The ExecuComp database on CEO compensation, Corporate Governance database provides BOD number and Compustat for firm specific data. SFAS 123 (R) became effective in 2005; therefore, this study omits the year 2005. The study uses publically traded US firms and compensation data for its CEOs. Multiple regression results support a positive association between expensing of stock options and earnings quality when firms have a large number of BOD members. Results are consistent with expectations established by prior research that compare earnings quality and BOD governance. The study is conducted with US publically traded firms only. Our findings contribute to the body of knowledge on CEO stock options compensation and earnings quality as well as BOD size and earnings quality, by showing that earnings quality is stronger when stock options are expensed as part of CEO compensation especially for the firms that have a larger BOD.