| Summary: | 碩士 === 臺灣大學 === 會計學研究所 === 96 === It has recently been a hotly debated issue that whether employee compensation, which includes both stock-based and cash-based dividends, should be treated as an expense under income statement. Majority of studies have inclined that employee compensation should be expensed. Their reason includes that the essence of employee compensation is similar to employee’s salary. But due to R.O.C.’s business accounting regulation that earnings to shareholders can not be treated as expense or loss, employee compensation in financial reporting is presented as retained earnings and not recorded under income statement as expense. This way, the financial report will tend to lose its integrity and investors are prone to make false investment decisions.
The distribution of stock-based compensation makes employee become shareholders of the company. The employees then are entitled to the cash dividend passed out by the company during the operating period. This will essentially dilute existing shareholders’ equity value. Therefore, treating employee compensation as earnings distribution will not reveal the true dilution effect on the existing shares’ value, consequently, the stock price will not be accurately reflected on the market. We apply the residual income valuation framework to analyze and compare the different equity values under distinct accounting methods: treating employee compensation as earnings distribution, treating employee compensation as expense with face value, and treating employee compensation as expense with market value. The regression results turn out that in general expensing employee compensation has more relevant relationship with stock price than that of treating employee compensation as earnings distribution.
Due to the fact that employee compensation comprises of two opposite effects- dilution and encouragement simultaneously, we add in the growth effect (ex. sales growth rate) to make clear the dilution effect. Moreover, we divide the data by time into three sections: 1999-2001, 2002-2005, 1999-2005, to see if the disclosure of the pro forma information of expensing employee compensation will affect investors’ decision making.
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