Determinants and Valuation Implications of Compulsory Stock Option Disclosures in a Weak Regulatory Setting—The Case of France

Abstract

Using a sample of listed French firms in 2005, the year of mandatory IFRS adoption in the European Union (EU), we investigate the determinants of disclosure compliance of stock option expenses under IFRS 2, Share‐based Payment. Stock options are a popular means of executive compensation in France relative to other EU countries. Prior to 2005, French accounting standards and corporate governance regulations did not require recognition of option expense amounts and required minimal supplementary disclosures. There was also a perception that enforcement was imperfect, in particular with respect to IFRS 2. Given this setting, we explore what factors influence the willingness of firms to follow compulsory IFRS requirements in a weak regulatory setting. We find that overall compliance with IFRS 2 disclosure requirements increases with U.S. and U.K. institutional ownership, U.S. cross‐listing, provision of English language statements, and decreases with CEO and family ownership of the firm. We also investigate how stock market prices are affected by the recognition and disclosure of stock option expenses according to IFRS 2 in this regulatory setting and find that investors value option expenses positively, particularly when accompanied by high‐disclosure compliance. Our findings have implications for other jurisdictions in the process of adopting or converging to IFRS.

Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve?

“…The second category, pertaining to specific areas, includes studies of business combination and goodwill impairment test disclosures in Europe (Glaum, Schmidt, Street, & Vogel, 2013;Mazzi et al, 2017), Australia (Bepari & Mollik, 2015;Bepari, Rahman, & Taher, 2014;Guthrie & Pang, 2013), Singapore (Carlin, Finch, & Khairi, 2010), the Netherlands and Sweden (Hartwig, 2015); studies of financial instrument disclosures in Italy (Maffei, Aria, Fiondella, Spanò, & Zagaria, 2014), Portugal (Lopes & Rodrigues, 2007), the UK (Linsley & Shrives, 2006;Woods & Marginson, 2004), the US (Lu & Mande, 2014) and in European banks (Bischof, 2009 ); studies of segment disclosures in global IAS-adopter samples, primarily European (Prather-Kinsey & Meek, 2004;Street & Nichols, 2002), 8 Germany (Franzen & Weißenberger, 2015), the US (Chen & Liao, 2015); studies of disclosure compliance in relation to financial statement presentation disclosures in the UK (Iatridis & Valahi, 2010); share-based payment and executive compensation disclosures in Australia (Bassett, Koh, & Tutticci, 2007), France (Goh, Joos, & Soonawalla, 2016) and the US (Robinson, Xue, & Yu, 2011); contingent liabilities in the US (Hennes, 2014) and intangible assets in Italy (Devalle, Rizzato, & Busso, 2016).…”

“…Having covered the areas that the literature on compliance with disclosure requirements has analysed more deeply, this subsection summarises a few of the studies that analyse less frequently examined areas. We find for example studies dedicated to the analysis of compliance with disclosures regarding presentation of financial statements (Rahman & Hamdan, 2017), the voluntary adoption of IAS 1 (Iatridis & Valahi, 2010), income tax (Ebrahim & Fattah, 2015), contingent legal liabilities (Hennes, 2014), intangible assets (Devalle et al, 2016), stock option disclosures (Bassett et al, 2007;Goh et al, 2016), executive compensation (Robinson et al, 2011) and leases (Fito, Arimany, Orgaz, & Moya, 2015) just to name some of them.…”

The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

“…Goh et al. () focus on recognition and disclosure of stock options in France. In other papers, such as Kallapur and Kwan (), who look at the market valuation of brands by 33 UK firms, and Chalmers et al.…”

Joint venture investments: An analysis of the level of compliance with the disclosure requirements of IFRS 12

“…Ownership concentration also may explain the level of disclosure (Glaum et al, 2013;Goh et al, 2016). A single shareholder owning a larger percentage of the shares will be able to obtain private information directly from the firm, not requiring public disclosure (Archambault & Archambault, 2003).…”