Study Finds Expensing May Affect Stock Prices

An analysis by Credit Suisse of the 236 S&P 500 companies for which First Call included consensus analyst estimates of the impact of options expensing on share prices found that for most companies, the impact was small and short-lived, but for the 47 where it was "material" (causing a decline of 5% or more in earnings), share prices fell on the day before the consensus was revised and continued to underperform the S&P 500 by about 2% for 20 days after the estimates were announced ("Options Expensing: Maybe It Does Impact Stock Prices"). Of the S&P 500 companies, however, 181 did not have their options expense included in First Call estimates (the remaining 63 companies had expensing included in their estimates, but not during the study period). The study shows that these companies tend to be the ones with the highest options expense impact. The authors suggest this may be because these companies are pushing their "pro forma" earnings estimates (that is, earnings minus what the company argues are charges unreflective of long-term performance) much harder, and analysts are going along.

The authors note that it is not certain that the stock price movement is specifically related to expensing; other factors cannot be ruled out. They do not report what percentage of the companies followed the pattern or whether the 2% difference was largely the result of outliers. But they do believe the number is large enough to suggest a pattern.