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Employee Stock Option Fair‐Value Estimates: Do Managerial Discretion and Incentives Explain Accuracy? *
Author(s) -
Hodder Leslie,
Mayew William J.,
McAnally Mary Lea,
Weaver Connie D.
Publication year - 2006
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/ml46-8401-6222-4642
Subject(s) - discretion , incentive , valuation (finance) , ex ante , stock (firearms) , value (mathematics) , accounting , business , economics , stock options , actuarial science , microeconomics , finance , political science , law , computer science , macroeconomics , engineering , mechanical engineering , machine learning
We examine the determinants of managers' use of discretion over employee stock option (ESO) valuation‐model inputs that determine ESO fair values. We also explore the consequences of such discretion. Firms exercise considerable discretion over all model inputs, and this discretion results in material differences in ESO fair‐value estimates. Contrary to conventional wisdom, we find that a large proportion of firms exercise value‐increasing discretion. Importantly, we find that using discretion improves predictive accuracy for about half of our sample firms. Moreover, we find that both opportunistic and informational managerial incentives together explain the accuracy of firms' ESO fair‐value estimates. Partitioning on the direction of discretion improves our understanding of managerial incentives. Our analysis confirms that financial statement readers can use mandated contextual disclosures to construct powerful ex ante predictions of ex post accuracy.