Early Adopters of Fair Value Accounting for Stock-Based Compensation: A Case for Signaling

Abstract

This paper explores signaling as a possible explanation as to why companies voluntarily used the fair value method to account for stock-based compensation prior to it becoming mandatory in 2004. Our sample was divided into two groups, early adopters and non-adopters, to determine whether early adopters were signaling through their adoption decision that they were higher quality firms. A univariate analysis was performed to test the differences between the means of quantifiable attributes of the adopting and non-adopting firms for 2002 and 2003. Our findings are consistent with a signaling explanation that, for some firms, the decision to voluntarily expense options long before there was a requirement to do so signaled that these firms were committed to earnings quality and reporting transparency, and thus were more desirable to investors than their non-adopting counterparts.