Stock Option Plans in Italy: Accounting Treatment, Financial Crisis, and Other Determinants

Abstract

Many studies on employee stock option plans state that the favorable accounting treatment, even if not declared, has often been one of the main reasons for this form of compensation. According to that view, professionals and scholars forecasted that recognition required by IFRS 2 would imply a reduction in the granting of stock options as incentive means. On the other side, empirical evidence suggests that their widespread adoption cannot be explained by a single view, since many determinants play a role in their issue.In addition to the accounting change, stock options have recently been the target of growing criticism, especially when the financial crisis started to show its effects. That may have an impact not only on incentive effectiveness, but also on outrage costs limiting their use by listed firms.In such a perspective, the main purpose of the paper is to explore the impact of IFRS 2 and of the recent financial crisis on stock option granting. To achieve that objective, our analysis is focused on these external determinants, which will be tested together with other variables indicated by stock option literature (incentive alignment, financial constraints, and tax benefits).The analysis is carried out on the population of Italian listed companies on a ten-year time horizon (2000-2009). That setting is of particular interest to our research questions, since national GAAPs did not require any valuation in annual reports prior to 2005 and results from previous studies highlight a relevant role of external factors in explaining option granting.Empirical evidence suggests that: the mandatory transition to IFRS 2 did not have a significant effect on stock option granting, the issue of stock options is less likely to occur during the financial crisis, and firms with higher growth opportunities have a higher probability to grant stock options.