Publications
Publications
- 2007
- HBS Working Paper Series
The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing
By: Fabrizio Ferri and Tatiana Sandino
Abstract
In this paper we examine the economic consequences of over 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004–the first case where the SEC has allowed an accounting matter to be subject to an advisory vote at an annual meeting. We find evidence suggesting that ESO expensing shareholder proposals affected accounting and compensation choices. With respect to accounting choices, we find that: (i) targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, (ii) within targeted firms, the likelihood of adoption increases in the degree of voting support for the proposal; (iii) non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted by a proposal. With respect to the effect on compensation practices, we find that: (i) targeted firms where the proposal was approved experienced a decrease in the level of CEO compensation relative to the control sample of S&P 500 firms; (ii) within targeted firms, the degree of voting support for the proposal was associated with a decrease in the level of CEO compensation and a decrease in the use of ESO in CEO compensation.
Keywords
Executive Compensation; Financial Reporting; Employee Stock Ownership Plan; Corporate Governance; Investment Activism; Business and Shareholder Relations
Citation
Ferri, Fabrizio, and Tatiana Sandino. "The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing." Harvard Business School Working Paper, No. 08-022, September 2007.