Stock Options, Idiosyncratic Volatility, and Earnings Quality

Pervaiz Alam, Min Liu (), Zhefeng Liu () and Xiaofeng Peng ()
Additional contact information
Min Liu: Business Division, ASA Institute, New York, NY 11201, USA
Zhefeng Liu: Goodman School of Business, Brock University St Catharines, Onatario, Canada
Xiaofeng Peng: Department of Accounting, College of Business and Innovation, University of Toledo, Ohio 43606, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2015, vol. 18, issue 02, 1-30

Abstract: The value of stock options increases in both stock prices and volatility. It suggests that options might engender incentives for managers to increase both stock prices and volatility. Recent studies have documented a negative association between earnings quality and idiosyncratic volatility: Hence, the lower the earnings quality, the greater the idiosyncratic volatility, and the higher the value of stock options. This study investigates whether there is a link between CEO equity compensation and earnings quality. Using a simultaneous system of equations, we find negative correlations between the two, suggesting that managers have incentives to reduce earnings quality.

Keywords: Stock options; CEO compensation; executive compensation; earnings quality; earnings management; idiosyncratic volatility (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2015
References: View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219091515500113

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