The Economic Consequences of Share-Option Based Compensation: New Evidence from the US and EU Banking Sectors.

The mandatory adoption of IFRS2 and its equivalent FAS123R (Share-Based Payment) presented a radical change in financial reporting of Share-Option Based Compensation (SOBC). Both IASB and FASB adopted the view that disclosure is not an adequate substitute for recognition; consequently, all SOBC transactions ultimately lead to expense recognition, measured at the grant-date fair value of SOBC. This thesis identifies and evaluates the major financial reporting implications of alternative reporting methods of accounting for SOBC across a global context and over different time periods for pre and post adoption of IFRS2/FAS123R. It explores two key research questions using an international sample of US and EU banks over the period (2004-2011). The first research question aims to identify, analyse, compare and evaluate the total effect of the compulsory adoption of IFRS2/FAS123R, on selected banks’ performance measures. Underpinned by equity valuation and agency theories, the second question aims to assess the extent to which the mandatory recognition approach to expensing SOBC provides more value relevant information that better reflects the incentive properties of such rewards than the disclosure approach. The findings show that the expensing of SOBC has resulted in modest and statistically significant negative effects on both US and EU banks’ selected financial performance measures with the impact being more likely to be higher in the US banking sector. The reported modest impact does not reflect earlier research estimations indicating that concerns and criticism of the implementation of IFRS2/FAS123R are largely unsubstantiated. The results also indicate that the recognition regime to expense SOBC is significantly more value relevant and better reflects the intangible value attributable to such rewards, relative to the disclosure regime. The influence of the differences in the financial reporting contexts on the intangible value attributable to SOBC is less burdensome after the mandatory adoption of IFRS2/FAS123R.