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Companies' Modest Claims about the Value of CEO Stock Option Awards

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  • Yermack, David

Abstract

This paper analyzes company disclosures of CEO stock option values in compliance with the SEC's regulations for reporting executive compensation data to stockholders. Companies appear to exploit the flexibility of the regulations to reduce the apparent value of managerial compensation. Companies shorten the expected lives of stock options and unilaterally apply discounts to the Black-Scholes formula. Theoretical support for these adjustments is often thin, and companies universally ignore reasons that the Black-Scholes formula might underestimate the value of executive stock options. The findings not only cast light upon how corporations value executive stock options, but also provide a means of forecasting compliance with controversial new FASB requirements for firms to disclose the compensation expense represented by executive stock options. Copyright 1998 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 10 (1998)
Issue (Month): 2 (March)
Pages: 207-26

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Handle: RePEc:kap:rqfnac:v:10:y:1998:i:2:p:207-26

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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Cited by:
  1. Hess, Dieter E. & Lüders, Erik, 2000. "New economy accounting : why are broad-based stock option plans so attractive?," ZEW Discussion Papers 00-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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