This paper identifies, evaluates and analyses the resulting impact of mandatory expensing of share-based compensation (SBC) under IFRS2/FASB123R on a set of widely used performance measures in the EU and US banking industry. The paper shows that the accounting treatment of SBC schemes, following the mandatory adoption of IFRS2/FAS123R, has a statistically significant negative impact on the selected performance measures over the period . The impact also seems to be material, yet modest, for US banks and only for large and high-growth EU banks, indicating that earlier public concerns and criticisms of the implementation of IFRS2/FAS123R are largely unsubstantiated. The findings also show that banks continue to use SBC, but there is a reduction, albeit insignificant, in the recognised SBC expense over the period 2009-11. That is, earlier public concerns that firms would curtail employing SBC in their employees' compensation schemes to avoid the effect of SBC expense recognition on their financial ratios came to light after the first option life-cycle in the post-adoption period was over. The findings also show a marked movement towards using cash-settled-based payments, possibly due to their manipulative accounting treatment, a potentially interesting issue for related accounting research and accounting standard setters.
This paper contributes to the literature that analyses the relationship between Share-Option Based Compensation (SOBC) expense and shareholder returns. It utilises a sample of financial firms listed in the European Economic Area and Switzerland between 2005 and 2016 to make inferences about the impact of the financial crisis on the above-mentioned relationship. The paper also assesses the extent to which the relationship between SOBC expense and shareholder returns during the financial crisis varies with ownership concentration. We find evidence that the positive relationship between SOBC expense and shareholder returns is significantly more apparent during the financial crisis. This suggests that investors place more emphasis on the unrecognised intangible features of SOBC contracts during the crisis, even though their associated expenses are subject to managerial discretion and measurement errors. We also find that the positive relationship between SOBC expense and shareholder returns over the financial crisis is more pronounced when ownership is more concentrated. The results of our study are robust after controlling for firm size, potential investment growth opportunities, traditional banking activities and firm self-selection bias.
This paper examines the association between non-executive employee shareholding and financial reporting quality. The analysis is conducted using a sample of non-financial firms listed in eleven European countries between 2006 and 2017. We find a positive association between non-executive employee ownership and financial reporting quality. Furthermore, we find this positive association to be more pronounced for firms operating in the following settings: higher labour union density, more industry peer firms and more flexible labour market regulations. Overall, these findings support the view that employee shareholding enhances the quality of financial reporting by aligning the interests of employees with those of shareholders through two channels: reduced agency problems and enhanced employee retention. Our study contributes to the research on the impact of ownership characteristics on financial reporting incentives. It underscores the role non-executive employee ownership can play in improving a firm’s corporate governance and therefore the quality of financial reporting.
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