Influence of Stock Compensation Valuation on Firms’ Performances: Par Value vs Fair Value

The FASB has converged SFAS 123R with IFRS No.2, which simultaneously defines that the value of stock compensation is an expense under fair value method that must be recognized in the current statement of operations. However, under the fair value method, volatility of the market value of stock is easily subjected to the business cycle, political condition, managerial behavior, and macroeconomic factors, which results in a poor explanatory index than par value method. This paper limits the research target to stock option and restricted stock as incentive vehicles only, and investigates separately influence of stock compensation on firm's financial performance under par value and fair value. According to the empirical results, growth, firm size, and fixed asset turnover are all significant and positively correlated with EPS; debt ratio is significant and negatively correlated with EPS. Stock compensation presented in par value is significant in t value and increases EPS by 0.68% while stock compensation presented in fair value is not. Stock compensation presented in par value of 60.5% R-square seems that there’s no better explanation on the firm’s financial performance than that in fair value of 60.2%. Therefore, using the fair value method does not deviate the influence of stock compensation on firm's financial performance.