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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2007-25:
Disclosed Values of Option-Based Compensation - Incompetence, Deliberate Underreporting or the Use of Expected Time to Maturity?

Ken L. Bechmann and Toke L. Hjortshøj

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.

Keywords: na; (follow links to similar papers)

JEL-Codes: J30; J33; (follow links to similar papers)

34 pages, January 1, 2007

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