Use of independent valuation specialists in valuing employee stock options: evidence from IPOs

Michael D. Stuart () and Richard H. Willis ()
Additional contact information
Michael D. Stuart: Vanderbilt University
Richard H. Willis: Vanderbilt University

Review of Accounting Studies, 2020, vol. 25, issue 2, No 2, 438-473

Abstract: Abstract We investigate the impact of independent valuation specialists on the downward bias of pre-initial public offering employee stock option valuations. Undervalued stock price estimates underlying firms’ option grants produce option valuations that overstate earnings and provide employees with deep in the money options. We find independent stock price valuations are more likely for firms with a Big Four auditor and an audit committee accounting expert. Furthermore, valuations prepared by independent valuation specialists are less downward biased than those prepared internally. Cross-sectional results suggest the following. First, independent valuations have a stronger effect on reducing downward bias when the board is more independent, suggesting independent boards facilitate independent valuations. Second, independent valuations have a weaker effect on reducing downward bias when an accounting expert sits on the audit committee and when CEO equity ownership is greater, suggesting these factors offset the need for an independent valuation to reduce downward valuation bias.

Keywords: Independent valuation specialists; Accounting valuations; Initial public offerings; Stock option-based compensation; Downward bias (search for similar items in EconPapers)
JEL-codes: G13 G32 G34 J33 M41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-020-09534-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:25:y:2020:i:2:d:10.1007_s11142-020-09534-z

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-020-09534-z

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().