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Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration

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Abstract

Accounting for stock options and share-based remuneration is a controversial issue. The purpose of this study is to explore the impact of the mandatory adoption of IFRS 2 on accounting for share-based remuneration by Italian listed companies. The requirements under this standard could have relevant implications for corporate governance as IFRS 2 is expected to reduce the information asymmetry that may exist between corporate insiders and outsiders regarding such remuneration. Empirical evidence confirms that overall disclosure in annual reports concerning the costs of remuneration plans has increased following the adoption of IFRS 2, although some cases of lack of disclosure have also been found. We find that this change in accounting regulation has contributed towards revealing the ‘true’ cost of share-based remuneration to minority shareholders and other investors, together with some evidence of creative accounting surrounding the substance over form principle.

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Notes

  1. We refer to Lgs.D. 505 of 1999, which reformulated Article 48 of DPR 917/86 concerning employees’ income, and was enacted in January 2000.

  2. MTA International is the segment within Borsa Italiana’s regulated equity market that is dedicated to the trading of shares of non Italian issuers already listed in other EU regulated markets.

  3. This choice can be seen as creative, in the sense that it is in compliance with the existing regulations whilst possibly sidestepping the substance over form principle.

  4. The IASB framework (1989, para 30) considers that information is deemed to be material if its omission, misstatement or non-disclosure has the potential to adversely affect the decisions of financial statement users and/or management’s discharge of accountability. Along with previous research on this subject (see Botosan and Plumlee 2001; Street and Cereola 2004; Chalmers and Godfrey 2005), we have adopted a non-binding quantitative threshold (more than or equal to 5%) to assess materiality.

  5. We obtained similar results conducting the same test with the unweighted index.

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Acknowledgments

The paper has benefited from the useful comments of the participants at seminars held at the Universities of Cagliari and Padua, and the 2007 EIASM workshop in Siena. The authors wish to thank Stuart McLeay for his suggestions and Silvia Gaia for her research assistance. The normal caveats on author’s responsibility apply. This paper is the result of a joint effort of the two authors. In particular, Silvia Carta wrote Sects. 1, 2 and 4, while Andrea Melis wrote the Sects. 3 and 5.

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  1. University of Cagliari, Viale S. Ignazio 17, 09126, Cagliari, Italy

    Andrea Melis & Silvia Carta

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  1. Andrea Melis
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  2. Silvia Carta
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Correspondence to Andrea Melis.

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Melis, A., Carta, S. Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration. J Manag Gov 14, 435–446 (2010). https://doi.org/10.1007/s10997-009-9107-8

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