Abstract
AbstractThis study investigates whether SFAS 123R was effective at curtailing firms’ earnings management associated with stock option compensation. Using a difference‐in‐differences (DiD) analysis, I find that firms with high implied option compensation before SFAS 123R significantly reduced earnings management after SFAS 123R. The sub‐period analysis indicates that option compensation after SFAS 123R is negatively related to earnings management, while option compensation before SFAS 123R is positively related to earnings management. Overall, the findings indicate that SFAS 123R effectively diminished earnings management associated with stock option compensation.
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