Disclosure versus Recognition of Stock Option Compensation: Effect on the Credit Decisions of Loan Officers

Abstract

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.”

Recognition versus disclosure: evidence from fair value of investment property

“…Similarly, Bratten et al (2013) provide evidence that disclosed items are not processed differently from recognized items when the disclosures are salient and not based on management estimates (i.e., when reliability is not an issue). 22 Some experimental studies provide additional evidence that individuals tend to distinguish between recognized and disclosed accounting information in assessing a firm's performance, value, risk, and other attributes (e.g., Harper et al 1987;Hirst et al 2004;Viger et al 2008;Libby et al 2006). 23 The fair value of investment property and related revaluation gains reflect, among other things, net rental income (and hence, to some extent, future cash flows from operations) from future leases in the light of current conditions.…”

The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

“…This effect has been observed in studies on both nonsophisticated users, i.e. students and non-professional investors (Belzile, Fortin, & Viger, 2006;Cooper & Selto, 1991;Elliott, 2006;Frederickson & Miller, 2004;Harper et al, 1987;Hodge, Jollineau Kennedy, & Maines, 2004;Maines & McDaniel, 2000), and sophisticated users, namely financial analysts and bankers (Belkaoui, 1992;Brooks, Scott, & Pearson, 1996;Danos, Holt, & Imhoff, 1989;Elliott, 2006;Goldwater & Fogarty, 1995;Harper et al, 1987;Hirst & Hopkins, 1998;Hirst, Hopkins, & Wahlen, 2004;Hopkins et al, 2000;Hopkins, 1996;Munter & Ratcliffe, 1983;Sami & Schwartz, 1992;Viger et al, 2008).…”

“…Numerous behavioral studies in financial accounting indicate that sophisticated users (bankers and financial analysts) and non-professional investors alter their judgments and decisions when presented with a change in accounting information format and content (Harper, Mister, & Strawser, 1987;Hirst & Hopkins, 1998;Hopkins, Houston & Peters, 2000;Maines & McDaniel, 2000;Viger, Belzile, & Anandarajan, 2008). In view of these findings, it can be reasonably assumed that a change in accounting systems, as has occurred in Cameroon, affected the judgments and decisions of accounting information users in that country.…”

“…It also involves studying financial and non-financial characteristics, e.g. quality of management or the position of the firm within the industry (Beaulieu, 1994;Berry, Faulkner, Hughes, & Jarvis, 1993;Treacy & Carey, 1998;Viger et al, 2008). Collateral and the firm's repayment history in previous loan cases are also considered (Beaulieu, 1994;Berry et al, 1993;Kemp & Overstreet, 1990;Treacy & Carey, 1998).…”

Comprehensive income information: a user's perspective

“…The one-statement approach presents net income and OCI items in one single statement of comprehensive income, while the two-statement approach supplies a traditional income statement as well as an additional statement that starts with net income, considers OCI items and presents comprehensive income. Previous research suggests that the accounting information presentation format can influence investors' judgements and decisions (e.g., Maines and McDaniel, 2000;Viger et al, 2008). The current experimental study makes a further contribution to the literature by investigating whether the presentation format for CI information (in one or two income statements) affects nonprofessional investors' judgements and decisions.…”