Stock Option Expensing: The Role of Corporate Governance

Analysis of the corporate stock option expensing decision (before the practice became mandatory in 2006) continues to be of interest because it provides insight into the underlying factors affecting not only expense recognition, but the overall corporate decision‐making process. Using a sample of 207 companies that volunteered to expense options and more than 1,000 non‐expensing firms, the authors found that companies that provide more disclosure and appeared to have a stronger alignment of managerial and shareholder interests were also more likely to expense stock options—a finding that the authors view as indirect evidence that voluntary expensing was more likely to occur in companies that practiced effective corporate governance. And consistent with the prediction of efficient market theorists, the study also found no significant market reaction to announcements of these decisions to expense options. The study also found that companies that were the heaviest users of options—notably, smaller, high—growth, and less‐profitable firms—were least likely to expense them. And while this finding adds to the weight of evidence suggesting that companies often make accounting decisions designed to boost reported earnings, the authors also recognize that the possibility that the decision by other companies not to expense may have been a strategy designed primarily to preserve access to capital markets.     

Muslim religiosity and purchase intention of different categories of Islamic financial products

Considering the rapid growth of Islamic Financial Products (IFPs) worldwide and the limited research on Muslims’ buying behaviour of such products, this research examines the relationship between religiosity, consumer buying attitude and purchase intention towards different categories of IFPs. The findings suggest that buying attitude has full mediation for deposit, credit and capital market products and partial mediation for insurance products on the association between Muslim religiosity and their purchase intention. Interestingly, religiosity influenced positively even for insurance and capital market products. This is in contrast with our hypothesised relationships for capital and insurance products. The study contributes to the literature by enhancing our understanding of the complex mediating religiosity – buying attitude – purchase intention relationships for different categories of IFPs.     

Motivating high‐impact innovation: Evidence from managerial compensation contracts

We investigate the relationship between Chief Executive Officer (CEO) compensation and firm innovation and find that long‐term incentives in the form of options, especially unvested options, and protection from managerial termination in the form of golden parachutes are positively related to corporate innovation, and particularly to high‐impact, exploratory (new knowledge creation) invention. Conversely, non‐equity pay has a detrimental effect on the input, output and impact of innovation. Tests using the passage of an option expensing regulation (FAS 123R) as an exogenous shock to option compensation suggest a causal interpretation for the link between long‐term pay incentives, patents and citations. Furthermore, we find that the decline in option pay following the implementation of FAS 123R has led to a significant reduction in exploratory innovation and therefore had a detrimental effect on innovation output. Overall, our findings support the idea that compensation contracts that protect from early project failure and incentivize long‐term commitment are more suitable for inducing high‐impact corporate innovation.     

Predictors of flexible working arrangement provision in small and medium enterprises (SMEs)

SMEs comprise 99.7% of all private sector businesses in Australia and employ 70% of the private sector workforce. They are therefore important to policies on flexible work arrangements (FWAs). The provision of FWAs has been found to usually contribute positively to employee well-being and business performance. However, the majority of studies focus on large firms and it is unclear whether these associations apply equally to SMEs. Using data from the Australian Bureau of Statistics Business Longitudinal database for 2007–2011(n = 2788), this study investigates the extent to which factors such as firm size, industry sector, terms of employment, employees’ skills and use of the internet at work affect the provision of FWAs in SMEs. The findings show that smaller businesses are constrained by resources to provide FWAs, but do so in pursuit of industry norms and/or as a result of the profile of their employees. It is also easier to provide FWAs in certain industries than in others and use of the internet facilitates the provision of FWAs.     

Do Firms Use Tax Reserves to Meet Analysts’ Forecasts? Evidence from the Pre‐ and Post‐FIN 48 Periods

We examine whether firms decrease tax reserves to meet analysts’ quarterly earnings forecasts in the period prior to FIN 48, and whether that behavior changed following FIN 48. We use analysts’ forecasts of pretax and after‐tax income to impute premanaged earnings, or earnings before any tax manipulation. Pre‐FIN 48, we observe that firms reduce their tax reserves (i.e., increase income) when premanaged earnings are below analysts’ forecasts. Specifically, 78 percent of firm‐quarters that would have missed the analyst forecast if not for the tax reserve decrease, meet that target when the decrease is included. Furthermore, we find a significant positive association between the decrease in tax reserves and the deviation of premanaged earnings from analysts’ forecasts. In contrast, post‐FIN 48, we find no evidence that firms use changes in tax reserves to manage earnings to meet analysts’ forecasts. Thus, our results suggest that FIN 48 has, at least initially, curtailed firms’ use of tax reserves to manage earnings.     

FDI and Innovation: An Investigation into Intra- and Inter-industry Effects

It is often believed that transfer of technology and know-how resulting from foreign direct investment (FDI) goes beyond the actual projects undertaken by foreign investors and, spills over to domestic firms affecting their knowledge base and productivity. This paper is an endeavour to investigate the existence of spillovers and their impact on the innovative performance of domestic firms active in the manufacturing sector of India. By employing data on FDI by industry and merging it with information on time-variant buyer–supplier linkages obtained from a series of national input–outputs tables, the study develops intra-industry and inter-industry measures to capture the effects of FDI on innovation performance of the incumbent firms’ active in the same sector as the MNC and in upstream and downstream sectors. The econometric analysis after accounting for endogeneity issues reveals that FDI has a moderate impact on innovative performance of firms residing in identical industries. However, impact on the innovative performance of firms in supplying sectors appears to be statistically strong.     

How mutual fund investors’ objective and subjective knowledge impacts their information search and processing behaviour

Contrary to the popular belief that objective knowledge (OK) (that is, what is actually stored in the memory) and subjective knowledge (SK) (that is, what individuals perceive they know) differently impact information search and information-processing behaviour, an empirical study conducted on 268 mutual fund (MF) investors suggests no significant difference in the impact of OK and SK on the width and depth of information search and information processing. The study suggests that OK and SK significantly positively impact the width and depth of information search and information-processing behaviour, however, no significant difference exists in the way they impact. The possible explanation put forward is that even though MF investors may suffer from self-deception (that is, pseudo expertise) and report high knowledge (that is, high SK), the impact of SK on actual investment behaviour is not significantly different from that of OK. The implications of the findings are also discussed.     

Measuring service performance in mobile communications

With the rapid growth in the size of the cellular phone market, performance standards are emerging as the strategic imperative for the service providers in ensuring customer satisfaction. This article develops and validates a psychometrically sound multi-item measure of service performance in mobile communications. A pool of 16 items was developed to cover the hypothesised multiple aspects of service performance and tested using a sample of 120 customers. The construct validity of the multi-aspect service performance measure was evaluated through assessing convergent, discriminant and predictive validity.