Abstract
In Taiwan, a newly announced accounting rule requires optiongranting firms to recognize stock-based compensation starting from 2008. We find a sample of high-tech firms during 2004-2009 grants a huge amount of options in 2007, resulting in an enormous unrecognized stock-based compensation in 2008 and 2009. Despite managers' attempts to sidestep the adverse effect of ESO expense on their firm's profitability and thus on share prices, we find that investors on average negatively price the unrecognized expense. Further, we also find the negative pricing effect of disclosed stock-based expense becomes more pronounced after 2008. More interestingly, we find that in the early (later) stage of the sample period, disclosed option-related expense is positively (negatively) related to firm value. Additional tests suggest that the size of disclosed stock-based compensation and profitability of firms cannot satisfactorily explain such unique patterns in the pricing effect. Instead, the results are more in line with the explanations of the new recognition rule effect and the ＂fade out＂ effect. Finally, we do not find any significant results for ESO expense recognized in 2008 and 2009, which is probably driven by its insignificant size.