Investor perception of managerial discretion in valuing stock options: an empirical examination

Investor perception of managerial discretion in valuing stock options: an empirical examination Managers have significant discretion over option-pricing model input assumptions for reported stock option values in SEC filings. However, it is unclear how investors perceive such discretion. By modeling the discretionary component of employee stock option (ESO) value, we examine what determinants drive the ESO discretions and whether the discretions convey value-relevant information to investors or represents merely managerial opportunism. We find that the changes in firms’ future operating risk drive understatement of ESO values, and that the understatement of ESO value is significantly negatively associated with stock price, suggesting that the market does incorporate the information underlying this component into its valuation assessment. This result is consistent with the notion that outside investors perceive ESO discretion as a signal of estimated future operating risk. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Investor perception of managerial discretion in valuing stock options: an empirical examination

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-015-0518-0
Publisher site
See Article on Publisher Site

Abstract

Managers have significant discretion over option-pricing model input assumptions for reported stock option values in SEC filings. However, it is unclear how investors perceive such discretion. By modeling the discretionary component of employee stock option (ESO) value, we examine what determinants drive the ESO discretions and whether the discretions convey value-relevant information to investors or represents merely managerial opportunism. We find that the changes in firms’ future operating risk drive understatement of ESO values, and that the understatement of ESO value is significantly negatively associated with stock price, suggesting that the market does incorporate the information underlying this component into its valuation assessment. This result is consistent with the notion that outside investors perceive ESO discretion as a signal of estimated future operating risk.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: May 29, 2015

References

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