We investigate factors associated with firms’ decisions in 2002 and early 2003
to recognize stock-based compensation expense under Statement of Financial
Accounting Standards (SFAS) No. 123. We find that the likelihood of SFAS
123 expense recognition is significantly related to the extent of the firm’s
participation in capital markets, the private incentives of top management
and members of the board of directors, the level of information asymmetry,
and political costs. Although recognizing firms have significantly smaller SFAS
123 expense, we find no significant incremental relation between recognition
likelihood and SFAS 123 expense magnitude after controlling for other
factors that we expect explain the recognition decision. We also find positive
and significant announcement returns for earlier announcing firms, particularly
those stating that increased earnings transparency motivates their
decision.