مدیریت سود در حدود صدور مجدد گزینه سهام کارمندان

We investigate market behavior in a setting where managerial incentives to manipulate earnings and market price should be apparent ex ante to market participants. We find evidence of abnormally low discretionary accruals in the period following announcements of cancellations of executive stock options up to the time the options are reissued. Nevertheless, analysts and investors are not misled. Discretionary accruals have little power in explaining stock price performance during this period. Moreover, discretionary accruals do not explain subsequent analyst forecast errors. Thus, our findings suggest that, in this transparent setting, analysts and investors do not respond to earnings management.

The extent to which earnings management by firms affects investor perceptions continues to attract interest. Academic research focuses largely on accounting adjustments to the firm's cash flows from operations. Since the timing of cash transactions does not necessarily match the timing of economic transactions, financial reporting regulations allow firms discretion over accruals.1 The intention of standard setters and regulators in allowing some degree of reporting flexibility is to provide enough latitude so that financial statements can be made more informative. Nevertheless, in a world of asymmetric information and agency problems, the discretionary nature of accrual accounting can lead to earnings manipulation. As Healy and Wahlen (1999, p. 368) suggests, “… managers (may) use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” Although there is some evidence that accruals management yields more informative financial statements,2 there also is strong evidence that investors do not necessarily understand precisely what is communicated by accruals. Sloan (1996) finds that future abnormal stock returns are negative (positive) for firms whose earnings include positive (negative) current accruals. Collins and Hribar (2000), using quarterly earnings data, reports similar evidence that the market overprices accruals. Xie (2001) uses a modification of the Jones (1991) model to estimate normal (benchmark) accruals and finds that Sloan's results are due primarily to the “abnormal” or “discretionary” component of accruals. Such overpricing could reflect an inability of the market to recognize the mean reversion in earnings due to the accruals component. While evidence of mispricing raises concerns about the usefulness of discretionary accrual accounting, it does not necessarily imply opportunistic manipulation by managers. To get at this issue, a number of studies have focused on firm-specific events that potentially provide strong incentives for management to manipulate market price by managing accruals. There is considerable evidence that manipulation occurs around such events3 and growing evidence that the market does not see through this type of manipulation. Of particular interest is recent results in Teoh et al., 1998a and Teoh et al., 1998b and Rangan (1998) which suggest that managers aggressively manage accruals prior to initial public offerings and seasoned equity offerings, that the market overprices these accruals, and, thus, that the market overvalues the new issues. A follow-up study by Teoh and Wong (2002) examines the role of financial analyst credulity in this process. The results are consistent with the hypothesis that analysts are more overoptimistic about firms with larger pre-issue accruals and investors are not aware of the full extent of this bias. In other words, investors relying on overly optimistic analysts overvalue new equity issues. It is particularly striking that abnormal negative post-announcement stock price performance persists for up to 5 years and predictable (from prior accruals) analyst forecast errors have significant power to explain the long-run underperformance.4 Thus, the evidence in these studies suggests that analysts and investors are boundedly rational in that they are slow to recognize and unravel these accounting manipulations once the equity issue has been announced and the incentive to manage accruals prior has been revealed. In this paper, we investigate the extent of analyst and investor rationality in a unique experimental setting in which the incentive to manage earnings in the future should be apparent ex ante to market participants. 5 In particular, we examine earnings management around the cancellation and subsequent reissue of executive (and other employee) stock options. A firm that alters the structure of managerial compensation using this method first cancels the outstanding options and then, after a clearly and publicly specified period of time, reissues new options. 6 In the typical case, the firm announces the plan to reissue and then allows a month or so for employees to decide how many options to tender. This offer period is then closed, and, typically, 6 months and 1 day later the options are reissued with the strike price set at the then-current (reissue day) market price. Since managers of such “6-and-1” firms benefit from a lower strike price for the reissued options, investors and analysts should be able to anticipate managerial attempts to manage accruals downward prior to the reissue date. 7 Based on a sample of 159 reissues, we find strong evidence of abnormally low accruals leading up to the option reissue date. Reissuing firm discretionary accruals are significantly negative and significantly lower than discretionary accruals for a control sample of firms with similar characteristics, specifically, firms that reprice their employee options in the traditional manner. Thus, even in a setting where investors are aware of the incentives to manipulate stock price, the evidence is consistent with the notion that managers attempt to manage accruals to their own benefit. Our analysis of contemporaneous and future stock returns, however, suggests that analysts and investors are not misled. Discretionary accruals between the announcement date and the reissue date have little power to explain stock price performance over the 9 months prior or the 6 months following the reissue date. The same is true for the collection of 5-day windows surrounding quarterly earnings announcements prior to the reissue date—the estimated discretionary accruals response coefficient is insignificantly different from zero. Moreover, discretionary accruals have no power to explain subsequent analyst forecast errors. Thus, in contrast to evidence from earlier studies where the incentives to manipulate are not necessarily foreseeable, in our setting, in which earnings management can be anticipated, analysts and investors do not respond to discretionary accruals. One interpretation of our results is that our findings are consistent with the hypothesis that the simplicity of our setting, based on cancellation and reissue of executive stock options, is well within the bounds of rationality of investors and analysts. That is, market participants possess cognitive capacity that exceeds the demands of our setting, in which it is relatively easy to evaluate incentives, accruals, and market price. In contrast, in other studies, such as Teoh et al., 1998a and Teoh et al., 1998b and Teoh and Wong (2002), investors and analysts appear to be unable to recognize the accounting deception ex ante and, apparently, are slow to unravel the deception ex post. One possibility is that investors and analysts have reasonable cognitive capabilities but incentives and accounting manipulation around these particular corporate events are not particularly transparent. Another possibility is that investors and analysts, limited by behavioral biases and the inability to penetrate and comprehend the situation, can be misled by simple accounting deceptions. Our evidence provides more support for the first of these possibilities, that investors possess at least some sophistication, and less support for the second. We also recognize the finding of no relation between stock returns and discretionary accruals could be due to error in measuring discretionary accruals. The remainder of the paper is organized as follows. Section 2 describes the details of resetting the strike price of employee stock options by cancellation and reissue. Section 3 describes how we select the sample of cancellations and reissues and collect the control sample of standard employee stock option repricings. Section 4 describes how we construct measures of earnings management and reports the results on the extent of earnings management, and Section 5 presents results on the effects of such management on analyst forecasts and stock returns. Section 6 concludes.

In this paper, we investigate the extent of analyst and market rationality around the cancellation and subsequent reissue of employee stock options. This event provides a unique experimental setting in which the incentives to manipulate earnings should be absolutely transparent to market participants. There is an obvious incentive to manage the stock price downward over a well-defined period in advance of the reissue date because managers prefer options with lower strike prices. Moreover, investors and analysts, because the cancellation and reissue is announced at least 6 months ahead of the option strike price reset date, should be able to anticipate such managerial attempts to manage earnings and stock price. Using methods employed in the prior literature, we investigate whether managers still attempt to manage earnings in this simple environment, whether these attempts at manipulation have the desired effect on stock price, and the role of analyst credulity in the process. Based on a sample of 159 reissues, we find strong evidence of abnormally low discretionary accruals leading up to the option reissue date. Thus, even in a setting where investors are aware of the incentives to manipulate stock price, it appears that managers still attempt to manage accruals to their own benefit. Our analysis suggests that the market does not respond to the abnormally low discretionary accruals. Discretionary accruals between the announcement date and reissue date have little power to explain stock price performance over the 9 months prior to the reset date, the 6 months following the reset date, and the narrow window containing earnings (and accruals) announcements. Moreover, discretionary accruals have no power to explain subsequent analyst forecast errors. Thus, in contrast to the evidence from earlier studies, where the incentives to manipulate are not necessarily foreseeable, in our setting, in which earnings management can be anticipated, neither analysts nor investors are misled by manipulation of accruals. Overall, our findings stand in sharp contrast to evidence in other studies, such as Teoh et al., 1998a and Teoh et al., 1998b and Teoh and Wong (2002), suggesting that investors and analysts are “naive” in that they are unable to recognize and very slow to unravel accounting deceptions. One possibility suggested by our findings is that investors and analysts are reasonably sophisticated but incentives and accounting manipulation around these particular corporate events are not particularly transparent. In this sense, the more transparent cancellation and reissue setting we investigate is well within the bounds of rationality of investors and provides evidence on the extent of investor and analyst gullibility. A more aggressive interpretation of our findings is that it shows that investors and analysts do see through accounting deceptions and, thus, something else is driving the results in the earlier studies. We leave further investigation of these alternative interpretations to future study.