A methodology proposal for Stock Market Reactions to Expensing Stock Option Compensations

Stock options are very controversial financial instruments and new disputes arise regarding their introduction into expenses. In this paper we specifically consider the impact of stock option compensation recognition on the stock returns. The fact that there are early adopters of the new regulation to come allows us to run an event study to analyze people reactions to expensing. As these compensations are already provided by all the firms in the footnotes of their financial statements their values should be already included in the price. However we expect that their recognition will be accompanied by negative abnormal returns providing evidence for momentum at the date of the announcement and a reverse effect on a longer horizon.