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Review of Accounting Studies

Erschienen in:

01.09.2010

Contagion of accounting methods: evidence from stock option expensing

verfasst von: David A. Reppenhagen

Erschienen in: Review of Accounting Studies | Ausgabe 3/2010

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Abstract

I examine how a firm’s accounting methods can be influenced by the choices of other firms, which I label contagion. I model accounting method choice as a combination of intrinsic propensities to adopt a method and contagion effects. I predict contagion of accounting methods occurs for two reasons: (1) adoption decisions of other firms are informative for the adoption decision, and (2) prior adoptions change the net benefits of the decision. I test these predictions in the stock option expensing setting where firms had the choice to use the intrinsic or fair value method. Using a firm-level diffusion model, I document evidence consistent with my predictions.

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There are some recent papers examining the role of other firms in other accounting settings (e.g., Kedia and Rajgopal 2007; Tse and Tucker forthcoming; Gleason et al. 2008). In addition, this paper is related to information transfer studies, but generally those studies focus on how investors’ views of company A are impacted by actions of company B. In addition, there is a significant literature on analyst herding.

In the diffusion of innovations literature, newness to an agent includes whether the agent has previously adopted the innovation (Rogers 2003, p. 12).

Managers may very well consider ex ante the future decisions of other managers. My focus, however, is on how managers react to the ex post realization of those decisions from other managers. If managers have already factored in the ex ante probability of another firm adopting the method, this should bias against my results.

The decision to adopt in a given period is likely analogous to exercising an option. Managers have discretion as to the period of adopting and likely consider the expected benefits for multiple future periods during their decision.

The prior adoptions that produce spillover effects could also provide information that will improve the estimate of the net benefits. Thus, for some firms, these two explanations may occur simultaneously and are likely difficult to distinguish empirically.

These authors have slightly different definitions of uncertainty, but essentially they refer to the inability of individuals to know a unique probability distribution of outcomes for an event. They all agree that this ignorance is the normal condition that individuals face in most situations rather than the situation of risk.

The most relevant information would be the direct consequences of other firms’ accounting choices and how those consequences directly map into the potential adopter’s situation. However, this information is likely difficult to observe.

Board interlocks have been associated with the transmission of corporate behavior in multiple settings: poison pills (Davis 1991), golden parachutes (Davis and Greve 1997), investor relations departments (Rao and Sivakumar 1999), stock exchange defections (Rao et al. 2000), backdating stock options (Bizjak et al 2007), and numerous others.

The auditor can also influence accounting choice by deciding, independent of its client base, on the merits of a particular accounting treatment and promoting that treatment to its clients.

One significant difference between contagion as specified here and the herding literature is that the communication, or information, channels have been more thoroughly developed in the contagion literature.

Strategies of differentiation can also result from competition. Likely, it is this strategy that could cause the initial firms to adopt a new practice. Firms that follow these strategies are necessary to start the diffusion process.

I view susceptibility as essentially moderating the relationship between the influence of prior adoptions and the likelihood of adoption.

Some of the settings examined with this model include choice of stock exchange (Rao et al. 2000), use of poison pills and golden parachutes (Davis and Greve 1997), radio station strategy (Greve 1995), and the diffusion of tetracycline (Strang and Tuma 1993).

Censoring occurs when event times occur outside of the sample period (Box-Steffensmeier and Jones, p. 16).

While two of these variables are also in the intrinsic vector (x _n), their presence in the susceptibility vector captures a different effect. Intrinsic variables impact adoption due to direct effects on the choice, whereas susceptibility variables impact adoption indirectly through the influence that prior adoptions have on the choice. Thus susceptibility is like an interaction, or moderating, effect.

The Haversine formula is used to calculate the distance between points 1 and 2 using latitudes (lat) and longitudes (long): distance (1,2) = R * (2 * arcsin[min(1,a^1/2)]) where R is the radius of the earth (3,963 miles or 6,378 km) and a = sin(lat2 − lat1)/2)² + cos(lat1) * cos(lat2) * sin(long2 − long1)/2)² (Sinnott 1984).

AIC equals (−2 * lnL + 2P) where L is the maximized value of the likelihood function, and P is the number of parameters in the model.

AIC differences are computed as Δ_i = AIC_i − AIC_min, where AIC_min is the model with the lowest AIC.

Akaike weight, w _i = exp(−0.5 * Δ_i)/∑ _r(exp[−0.5 * Δ_r]), where Δ_i is the AIC difference for the current model and the denominator sums across each of the r models considered.

The FASB began re-considering the accounting treatment of stock options in the 1980s (FASB 1995, Para. 365); however, the history of stock options dates back to at least the 1920s. (See Reppenhagen 2010, Unpublished Dissertation, Emory University for a more complete review.).

The IASB and FASB initially agreed in September 2002 to promote accounting standards convergence.

SEC release 33-8568 delayed the effective date to fiscal years beginning on or after June 15, 2005.

Two US firms were listed twice on the report and their latter observations were removed.

I proxy for the issuance of stock options to any employees using stock options granted to executives in Execucomp.

The number of firms increases from 2,654 to 2,948 because 294 firms were on the adopter list but not in the at-risk sample. Almost all of these firms are not on Execucomp (278) and thus will drop out in the data requirement step since the executive compensation variables will have missing values.

Even though 278 adopters do not meet the data requirements for the final sample, their observations were used when determining the influence of prior adopters and when calculating the hazard rate. This correction theoretically prevents a misspecified model and biased estimation (Greve 1996, pp. 44–45). Although, ignoring this correction does not seem to affect the inferences.

My results are still supported when I using the natural log of the intrinsic variables with high skewness (for example, OPTION_EXPENSE).

The Pearson correlation coefficient matrix supports similar inferences.

Here I show only two intrinsic and two contagion variables, but untabulated results suggest these inferences generally hold across both sets of variables.

Another interpretation is that rivals have very similar intrinsic propensities to adopt, and the coefficient is picking up some unidentified intrinsic propensity to adopt. If that is true, then at the very least the results from H1a and H1b are more strongly supported in column 4 by including a variable that picks up additional intrinsic variables.

The intrinsic vector does have stronger support in the post-2002 period with INSTOWN & ACTIVITY loading significantly in the predicted direction.

This is not surprising as many of the financial firms were located in the same city (New York).

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Titel: Contagion of accounting methods: evidence from stock option expensing
verfasst von: David A. Reppenhagen
Publikationsdatum: 01.09.2010
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 3/2010
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-010-9128-1

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