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We examine if different stock option reporting formats affect bank loan officers' judgments and decisions. Three formats were used: (1) descriptive note of stock options plan only, (2) descriptive note that included a pro forma disclosure showing the impact of expensing the cost of stock options on net income, and (3) recognition of the stock options cost in the income statement. Our results show that loan officers estimated a higher risk rating and a more pessimistic trend rating, were less inclined to grant the loan, and charged a higher risk premium when the stock option expense was recognized in the income statement. Judgments and decisions did not significantly differ for the two methods of footnote disclosure, suggesting that loan officers are functionally fixated on reported earnings. Overall, our results support the FASB's claim that “disclosure is not an adequate substitute for recording.”

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