Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration
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Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration Andrea Melis Æ Silvia Carta
Published online: 17 July 2009 Ó Springer Science+Business Media, LLC. 2009
Abstract Accounting for stock options and share-based remuneration is a controversial issue. The purpose of this study is to explore the impact of the mandatory adoption of IFRS 2 on accounting for share-based remuneration by Italian listed companies. The requirements under this standard could have relevant implications for corporate governance as IFRS 2 is expected to reduce the information asymmetry that may exist between corporate insiders and outsiders regarding such remuneration. Empirical evidence confirms that overall disclosure in annual reports concerning the costs of remuneration plans has increased following the adoption of IFRS 2, although some cases of lack of disclosure have also been found. We find that this change in accounting regulation has contributed towards revealing the ‘true’ cost of share-based remuneration to minority shareholders and other investors, together with some evidence of creative accounting surrounding the substance over form principle. Keywords Accounting regulation Corporate governance Disclosure IFRS 2 Italy Share-based remuneration Stock options
1 Introduction Accounting for share-based remuneration represents one of the most controversial issues in the accounting and corporate governance research literatures. Financial reporting and corporate governance are indeed highly interrelated: in particular, financial reporting constitutes an important element of the corporate governance A. Melis (&) S. Carta University of Cagliari, Viale S. Ignazio 17, 09126 Cagliari, Italy e-mail: [email protected] S. Carta e-mail: [email protected]
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system, as it may potentially reduce the information asymmetry between corporate outsiders and insiders such as executive directors and controlling shareholders (see, for example, Whittington 1993; Melis 2004; Di Pietra 2005). The recognition of share-based remuneration as a cost that is expensed in the Profit and Loss Account is the recent outcome of a long debate between standardsetters and the preparers of accounts (Guay et al. 2003). In the US, the final result has been the issue of a revised version of SFAS 123R (2004); in Europe, it is the mandatory adoption by listed companies of IFRS 2 (2004). Each of the two standards has required the recognition of the cost of share-based remuneration, to be measured at the fair value of the equity instruments at the grant date. Accounting is concerned with how economic actors process information and make decisions. It cannot be considered simply as a neutral technique for economic decision-making as it is able to sanction the distribution of wealth among corporate stakeholders, including shareholders (e.g. Horngren 1973; Rappaport 1977). Both the issue of SFAS 123R in the US and of IFRS 2 by the IASB have followed significant lobbying activity by c
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