MS 7335 - Impact of Shareholder Activism-1.pdfVIP

The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing Fabrizio Ferri Harvard Business School, Harvard University Tatiana Sandino Marshall School of Business, University of Southern California We thank Dan Dhaliwal, Steven Kachelmeier, and two anonymous reviewers for their suggestions to improve the paper. Also, we thank Mark DeFond, Greg Miller, Kevin Murphy, K.R. Subramanian, Jieying Zhang, and participants at the 2006 Financial Management Association Annual Meeting for their comments and suggestions. We are grateful to John Core and Wayne Guay for providing their industry classification and to David Huelsbeck for his research assistance. Special thanks to Ed Durkin, Director of Corporate Affairs Department at the United Brotherhood of Carpenters and Joiners of America (UBCJA) for extensive conversations on UBCJA’s activity. All errors are our own. 1 The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing Abstract We examine the economic consequences of more than 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004, the first case in which the SEC allowed a shareholder vote on an accounting matter. Our results indicate that these proposals affected accounting and compensation choices. Specifically, (i) targeted firms were more likely to adopt ESO expensing relative to a control sample of SP 500 firms, (ii) among targeted firms, the likelihood of adoption increased in the degree of voting support for the proposal, and (iii) non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted. Additionally, (i) CEO pay decreased in firms in which the proposal was approved relative to a control sample of SP 500 firms, and (ii