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

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  • Chii-Shyan Kuo

    (National Taiwan University of Science and Technology)

  • Xu Wang

    (Saint Louis University)

  • Shih-Ti Yu

    (National Tsing Hua University)

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.

Suggested Citation

  • Chii-Shyan Kuo & Xu Wang & Shih-Ti Yu, 2016. "Investor perception of managerial discretion in valuing stock options: an empirical examination," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 733-773, October.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:3:d:10.1007_s11156-015-0518-0
    DOI: 10.1007/s11156-015-0518-0
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    More about this item

    Keywords

    Value relevance; Employee stock option value; Information communication; Opportunistic manipulation;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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