Purpose -Until 2005, corporations could choose whether to expense incentive options or to disclose the value in the financial footnotes. During 2004, however, the Financial Accounting Standards Board adopted the revised Statement No. 123, which requires public corporations to measure the cost of stock options on grant-date and expense that cost over the vesting period of the grant. This study investigates the impact of SFAS 123(R) on the type of executive incentive pay-option versus restricted stock. Design/methodology/approach -Comprehensive compensation data was collected from Standard & Poors ExecuComp data base for the period 2002-2006 for two industries identified by SIC codes 73 (business services) and 35 (electronics). The study tracks the percentage of pay in the form of incentive stock options or restrictive stock grants before and after SFAS No. 123(R) was adopted in 2004. A series of multivariate regression models test whether the restricted stock percentage of total compensation can be partially explained by the adoption of SFAS 123(R). Findings -The results show that the average fair value of stock awards is higher and the average fair value of option awards is lower after 2004. In addition, after 2004, stock compensation as a percentage of total pay is positively related to stock price volatility. The data also suggest that those companies substituting restricted stock for options actually increase total incentive pay. Social implications -The study's findings may suggest that those companies substituting restricted stock for options increase total executive pay. This would be a side effect from the adoption of SFAS 123(R), in that most companies use the Black-Scholes model to value executive options. Given the long life of these options and the high volatility in certain industries the option value is quite high. Therefore, the amount of substituted restricted stock is also inflated. Originality/value -The adoption of SFAS 123(R) was highly contested by executives in industries with high stock price volatility. The authors document that, in the case of two industries, executive incentive pay structure was affected.
Equity investors are always interested in identifying profitable trading strategies. The price-to-earnings ratio (P/E) and price-to-sales ratio (P/S) are two simple metrics that researchers have reported may meet this objective under particular market conditions. During our study period, which is longer in duration than most of the previous works, the performance of portfolios based on P/S dominated those based on P/E. However, portfolios based upon the combination of low P/E and net profit momentum outperformed all other strategies tested. Another way the predictive power of P/E may be improved is by dividing it by a measure of the firm's earnings growth, yielding a composite metric known as the price-to-earnings-to-earnings growth ratio (PEG). This metric has gained the attention of professional investors and researchers. Because many investors prefer P/S over P/E, it is surprising that a counterpart to PEG has not gained similar traction. Our results provide evidence that helps explain why the price-to-sales-to-sales growth ratio (PSG) has failed to gain attention. Our results also indicate that none of these market multiples alone can be employed to provide consistently profitable investment performance.
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