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

Chii-Shyan Kuo, Xu Wang () and Shih-Ti Yu
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Xu Wang: Saint Louis University

Review of Quantitative Finance and Accounting, 2016, vol. 47, issue 3, No 11, 733-773

Abstract: 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.

Keywords: Value relevance; Employee stock option value; Information communication; Opportunistic manipulation (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11156-015-0518-0

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