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Evidence on differences between recognition and disclosure: A comparison of inputs to estimate fair values of employee stock options

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  • Choudhary, Preeti
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    Abstract

    I investigate reliability differences across recognition and disclosure regimes to shed light on differing incentives and reporting of employee stock option (ESO) fair values. I compare ESO fair values based on firm-reported inputs with ESO fair values based on benchmark inputs, estimated following authoritative guidance. On average, I find opportunism increases with recognition as compared with disclosure, and that it is associated with incentives to manage earnings. Despite the increase in opportunism, I find that accuracy does not decline for recognizers, and that accuracy differs across voluntary and mandatory recognition.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 51 (2011)
    Issue (Month): 1-2 (February)
    Pages: 77-94

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    Handle: RePEc:eee:jaecon:v:51:y:2011:i:1-2:p:77-94

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Fair value Earnings management Recognition versus disclosure Employee stock options;

    References

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    1. Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 36(1-3), pages 337-386, December.
    2. Espahbodi, Hassan & Espahbodi, Pouran & Rezaee, Zabihollah & Tehranian, Hassan, 2002. "Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 33(3), pages 343-373, August.
    3. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 31(1-3), pages 3-75, September.
    4. Degeorge, Fran├žois & Patel, U & Zeckhauser, Richard, 1998. "Earnings Management to Exceed Thresholds," CEPR Discussion Papers 1790, C.E.P.R. Discussion Papers.
    5. John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004. "The Economic Implications of Corporate Financial Reporting," NBER Working Papers 10550, National Bureau of Economic Research, Inc.
    6. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(4), pages 655-69, November.
    7. Preeti Choudhary & Shivaram Rajgopal & Mohan Venkatachalam, 2009. "Accelerated Vesting of Employee Stock Options in Anticipation of FAS 123-R," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 105-146, 03.
    8. Ramanna, Karthik, 2008. "The implications of unverifiable fair-value accounting: Evidence from the political economy of goodwill accounting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 45(2-3), pages 253-281, August.
    9. Anne Beatty & Joseph Weber, 2006. "Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments," Journal of Accounting Research, Wiley Blackwell, vol. 44(2), pages 257-288, 05.
    10. Beatty, Anne & Ramesh, K. & Weber, Joseph, 2002. "The importance of accounting changes in debt contracts: the cost of flexibility in covenant calculations," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 33(2), pages 205-227, June.
    11. Mary E. Barth & Greg Clinch & Toshi Shibano, 2003. "Market Effects of Recognition and Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 581-609, 09.
    12. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 99-126, December.
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    Cited by:
    1. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 5.
    2. Xiaoyan Cheng & David Smith, 2013. "Disclosure versus recognition: the case of expensing stock options," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 591-621, May.
    3. Shu Wing Ho & Alan Lee & Alastair Marsden, 2011. "Use of Bayesian Estimates to determine the Volatility Parameter Input in the Black-Scholes and Binomial Option Pricing Models," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 4(1), pages 74-96, December.

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