The Impact of Accounting Regulation on Corporate Governance : Some Evidence from the Accounting for Stock Options in Italy

Accounting for stock options and executive remuneration have been one of the most debated and controversial issues in accounting regulation and corporate governance. The purpose of this study was to analyse the impact of the mandatory adoption of IFRS 2 for accounting of stock options in Italian non financial listed companies. This paper has investigated the economic consequences of recording the cost of stock options at its fair value, in terms of its impact on the companies' reported earnings, the evaluation method choice, and its disclosure in the financial statements as well as its implication on corporate governance. Empirical evidence shows that the introduction of IFRS 2 has increased the personnel costs and reduced the reported earnings. The impact of the mandatory recording of the cost of stock options measured at its fair value was found to be moderate on average. The overall disclosure concerning the beneficiaries of stock options plans, its evaluation and its recording in the financial statements is generally adequate. The mandatory adoption of IFRS 2 seems to have relevant implications for corporate governance as it has reduced the information asymmetry between corporate insiders and outsiders. Firstly, accounting regulation has increased the level of disclosure and has made the quot;truequot; cost of stock options unconcealed for minority shareholders and other investors. Secondly, some evidence of creative accounting was found concerning the elusion of the substance over form principle for the accounting of stock options plans set up before 7th November 2002. Thirdly, the empirical evidence concerning the beneficiaries of the stock options plans suggests that the diffusion of stock options plans in Italian non financial listed companies may be partly explained by the rent-extraction theory, rather than by the optimal contracting theory