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Disclosed Values of Option-Based Compensation - Incompetence, Deliberate Underreporting or the Use of Expected Time to Maturity?

Author

Listed:
  • Bechmann, Ken L.

    (Department of Finance, Copenhagen Business School)

  • Hjortshøj, Toke L.

    (Department of Finance, Copenhagen Business School)

Abstract
New accounting standards require ¯rms to expense the costs of option-based compensation (OBC), but the associated valuations o®er many challenges for ¯rms. Earlier research has documented that ¯rms in the U.S. generally underreport the values of OBC by manipulating the inputs used for valuation purposes. This paper examines the values of OBC disclosed by Danish ¯rms. The results suggest that ¯rms experi ence some di±culties in valuing OBC, but interestingly, there is no clear evidence of deliberate underreporting. For example, there is no evidence that ¯rms use manipulated values for the Black-Scholes parameters in their valuations. Furthermore, ¯rms determine the expected time to maturity in a way that is generally consistent with the guidelines provided by the new accounting standards. The ¯ndings di®er from those of the U.S., but is consistent with the more limited use of OBC and the lower level of attention paid to these values in Denmark. However, the di®erences can also be due to the fact that several Danish ¯rms do not provide the information required regarding their OBC, which is clearly a very e®ective way of hiding the true values.

Suggested Citation

  • Bechmann, Ken L. & Hjortshøj, Toke L., 2007. "Disclosed Values of Option-Based Compensation - Incompetence, Deliberate Underreporting or the Use of Expected Time to Maturity?," Working Papers 2007-25, Copenhagen Business School, Department of Finance.
    • Handle: RePEc:hhs:cbsfin:2007_025
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7143
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    Keywords

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    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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