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• Article | Review of Accounting Studies | July 4, 2012

  Why Do Pro Forma and Street Earnings Not Reflect Changes in GAAP? Evidence from SFAS 123R

  Ian D. Gow, Mary E. Barth and Daniel Taylor

  This study examines how key market participants—managers and analysts—responded to SFAS 123R's controversial requirement that firms recognize stock-based compensation expense. Despite mandated recognition of the expense, some firms' managers exclude it from pro forma earnings and some firms' analysts exclude it from Street earnings. We find evidence consistent with managers opportunistically excluding the expense to increase earnings, smooth earnings, and meet earnings benchmarks but no evidence that these exclusions result in an earnings measure that better predicts future firm performance. In contrast, we find that analysts exclude the expense from earnings forecasts when exclusion increases earnings' predictive ability for future performance and that opportunism generally does not explain exclusion by analysts incremental to exclusion by managers. Thus our findings indicate that opportunism is the primary explanation for exclusion of the expense from pro forma earnings and predictive ability is the primary explanation for exclusion from Street earnings. Our findings suggest the controversy surrounding the recognition of stock-based compensation expense may be attributable to cross-sectional variation in the relevance of the expense for equity valuation, as well as to differing incentives of market participants.

  Citation:

  Gow, Ian D., Mary E. Barth, and Daniel Taylor. "Why Do Pro Forma and Street Earnings Not Reflect Changes in GAAP? Evidence from SFAS 123R." Review of Accounting Studies 17, no. 3 (July 4, 2012): 526–562.

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• Other Unpublished Work | 2012

  The Efficacy of Shareholder Voting: Evidence from Equity Compensation Plans

  Ian D. Gow, Christopher S. Armstrong and David F. Larcker

  This study examines the effects of shareholder support for equity compensation plans on subsequent chief executive officer (CEO) compensation. Using cross-sectional regression, instrumental variable, and regression discontinuity research designs, we find little evidence that either lower shareholder voting support for, or outright rejection of, proposed equity compensation plans leads to decreases in the level or composition of future CEO incentive-compensation. We also find that in cases where the equity compensation plan is rejected by shareholders, firms are more likely to propose and shareholders are more likely to approve a plan the following year. Collectively, our results suggest that shareholder votes have little impact on firms' compensation policies and that recent regulatory efforts aimed at strengthening shareholder voting rights, particularly in the context of executive compensation, may have limited effect on firms' compensation policies.

  Keywords: Voting; Equity; Executive Compensation; Rights; Performance Effectiveness; Business and Shareholder Relations; Mathematical Methods; Motivation and Incentives;

  Citation:

  Gow, Ian D., Christopher S. Armstrong, and David F. Larcker. "The Efficacy of Shareholder Voting: Evidence from Equity Compensation Plans." 2012.

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• Chapter | The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies | 2011

  Fundamental Data Anomalies

  Ian D. Gow

  Citation:

  Gow, Ian D. "Fundamental Data Anomalies." Chap. 5 in The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies, edited by Len Zacks, 117–128. John Wiley & Sons, 2011.

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