Employee stock options and market efficiency

Abstract

This study investigates market reaction to SFAS 123 Revised, "Share Based Payment," which requires companies to recognize the fair value of employee stock options as expense on the income statement. Using a sample of 128 firms for the 2004 and 2005 periods, we find that markets have efficiently incorporated information formerly disclosed only in footnotes to the financial statements, effectively nullifying the argument that formally recognizing the expense would have a deleterious effect on stock prices of firms offering this type of compensation.