Incremental information content of option-related excess tax benefit under FASB Statement No. 123R: A research note

Purpose – This study aims to examine the incremental valuation implication of excess realized tax benefit under Statement of Financial Accounting Standard (SFAS) No. 123R: share-based payment (123R excess tax benefit), which is required to be reported as a component of financing cash flows by the publicly traded corporations. Design/methodology/approach – The sample comprises of Standard and Poor's (S&P); large-, mid- and small-cap firms who adopted SFAS No. 123(R) on January 1, 2006. The study covers a time period of the first and second quarters of 2006. Findings – The multivariate regression analyses indicate that the capital market evaluates the SFAS 123R excess tax benefit in presence of accruals, and operating, investing and other financing cash-flow components at different rates in pricing equity securities. Research limitations/implications – The primary results, however, are mostly restricted to large- and mid-cap S&P firms. No incremental valuation consequence of SFAS 123R excess tax benefits for small-cap S&P firms is observed. Originality/value – The findings suggest that the 123R excess tax benefit reported as a financing cash-flow component is incrementally informative in equity valuation but the timing and extent of its market valuation is impacted by firm size, its visibility and information environment, and the magnitude of the excess realized tax benefit in dollar terms.