The effects of SFAS-123R on corporate investment

This study examines the effects of mandatory expensing of stock options on corporate investment after the passage of SFAS-123R. First, we find an increase in corporate investment such as R&D investment and capital expenditure in the post-SFAS-123R period. Second, we find that stock-based compensation such as stock option compensation and restricted stock in the post-SFAS-123R period is positively related to investment. Our findings suggest that SFAS-123R discourages the opportunistic use of stock option compensation. The use of option compensation in the post-SFAS-123R era appears to encourage managers to pursue more long-term investment, which suggests that the SFAS-123R has had positive consequences.