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Stock Option Plans in Italy: Does Earnings Management Matter?

Many studies carried out on employee stock option plans state that the favourable accounting treatment, even if not declared, is often one of the main reasons for this form of compensation. This paper aims at determining whether there is an association between the granting of employee stock option plans and the adoption of earnings management practices aimed at improving the profit during the years when plans are issued. Our investigation uses the modified Jones model on a sample of Italian listed companies to study earnings management behaviour. This analysis can make a preliminary contribution to assess whether recognition required by IFRS 2 will imply a future reduction in the granting of stock options as incentive means. In fact, this accounting standard not only gives rise to a change in earnings figures and corporate disclosure, but could also force entities to revise their employee incentive policies. In such a perspective, it is reasonable to assume that the shift to IFRS 2 will lead companies that in the past issued stock option plans essentially for earnings management reasons to lessen the use of employee stock options.