Excerpt: This research examines the valuation effect and the factors associated with firms' decisions to expense executive stock options, as well as determinants of market reaction to expensing announcements. The likelihood of expensing is found to be higher for firms subject to fewer agency problems and having a 'share-holder friendly' corporate governance structure. These results suggest that the decision to expense is heavily influenced by the extent of discipline, monitoring, and how closely the interests of management and stockholders are aligned.

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