Transparent Financial Reporting: Characteristics of Companies That Voluntarily Elect to Expense Stock Options‪.‬

ABSTRACT Recent corporate scandals have focused attention on a number of accounting choice issues as well as the transparency of financial reporting. One heavily debated topic is the question of how to account for stock options. Under existing accounting standards, companies either record an expense on the income statement for stock options granted or simply disclose the information in the financial statement footnotes. Expensing the options is the more transparent choice. This study compares the characteristics of firms that recently switched to voluntarily expensing stock options with those of a control group of similar companies that continue to only disclose options. Results indicate that the larger the number of inside owners, and the larger the percentage of insider ownership, the less likely the company is to switch to expensing stock options. Additionally, companies with a greater number of institutional owners and larger, more independent Boards of Directors switch to expensing stock options more often. Finally, companies with more volatile earnings switch to expensing more often. Results for hypotheses related to companies with steadily growing earnings, a higher use of stock options for executive compensation, and relatively new Chief Executive Officers are not statistically significant.