Study: Option Expensing Has No Impact on Share Price

New York (Nov. 25, 2002) The recent move by a number of companies to include option expenses on their income statements has had no impact on their share price performance, according to a new report.

The Towers Perrin study looked at stock price reactions for 103 companies that announced in July and August that they plan to expense options in their income statements. The consulting firm tracked their share price during the 60 trading days before and 60 trading days after company declarations, and found that share price performance during the period was the same, on average, as the S&P 500.

Once adjusted for general market movement, the average stock price of announcing companies didn't show any significant change during the 120 trading days surrounding the declaration, Towers Perrin said.

“Investors do, in fact, take into account the economic cost of options, even though such an expense may not be previously reflected on the income statement because of favorable accounting treatment,” noted co-author Richard N. Ericson, a Towers Perrin principal.

“The study notes that in similar past situations, stock markets have ignored accounting and have paid attention to economics — for example, when examining company accounting choices in areas like inventory, depreciation or business combinations,” said Scott Olsen, co-leader of Towers Perrin's executive compensation consulting practice.

Based upon 2001 footnote data, option expenses for the announcing companies reduced earnings per share by an average of 10 percent. The study also found that the relative size of the prospective EPS impact of the option expense didn't affect share price reactions. At the median, revenue for the most recent year for companies profiled in the study was $6.1 billion, and current market capitalization is approximately $5.9 billion.

Related Articles

Back to top button