26 research outputs found
Stock Option Expense, Forward-Looking Information, and Implied Volatilities of Traded Options
Prior research generally finds that firms underreport option expense by managing
assumptions underlying option valuation (e.g. they shorten the expected option lives), but it fails to document management of a key assumption, the one concerning expected stock-price volatility. Using a new methodology, we address two questions: (1) To what extent do companies follow the guidance in FAS 123 and use forward looking information in addition to the readily available historical volatility in estimating expected volatility? (2) What determines
the cross-sectional variation in the reliance on forward looking information? We find that firms use both historical and forward-looking information in deriving expected volatility. We also find, however, that the reliance on forward-looking information is limited to situations where this reliance results in reduced expected volatility and thus smaller option expense. We interpret this finding as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. In support of this interpretation, we also find that managerial incentives
play a key role in this opportunism
Stock Option Expense, Forward-Looking Information, and Implied Volatilities of Traded Options
Prior research generally finds that firms underreport option expense by managing
assumptions underlying option valuation (e.g. they shorten the expected option lives), but it fails to document management of a key assumption, the one concerning expected stock-price volatility. Using a new methodology, we address two questions: (1) To what extent do companies follow the guidance in FAS 123 and use forward looking information in addition to the readily available historical volatility in estimating expected volatility? (2) What determines
the cross-sectional variation in the reliance on forward looking information? We find that firms use both historical and forward-looking information in deriving expected volatility. We also find, however, that the reliance on forward-looking information is limited to situations where this reliance results in reduced expected volatility and thus smaller option expense. We interpret this finding as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. In support of this interpretation, we also find that managerial incentives
play a key role in this opportunism
Investor Competition Over Information and the Pricing of Information Asymmetry
Whether the information environment affects the cost of capital is a fundamental question in
accounting and finance research. Relying on theories about competition between informed
investors as well as the pricing of information asymmetry, we hypothesize a cross-sectional
variation in the pricing of information asymmetry that is conditional on competition. We develop
and validate empirical proxies for competition using the number and concentration of
institutional investor ownership. Using these proxies, we find a lower pricing of information
asymmetry when there is more competition. Overall, our results suggest that competition
between informed investors has an important effect on how the information environment affects
the cost of capital.Deloitte Foundatio
Informatizacija procesov upravljanja odnosov s strankami
This paper investigates the decision by top-level executives of more than 1,200
public corporations to exercise large stock option awards in the period 1992-2001. We
hypothesize and find that abnormally large option exercises predict stock return future
performance. We then hypothesize that this predictive ability represents private information about disappointing earnings in the post-exercise period. Consistent with this hypothesis we find that abnormally positive earnings performance in the pre-exercise period turns to disappointing
earnings performance in the post-exercise period, and that this pattern comes as a surprise to even sophisticated market participants (financial analysts). We also hypothesize and find that the disappointing earnings in the post-exercise period represent a reversal of inflated earnings in the pre-exercise period. Collectively, these findings suggest that the private information used by top-level executives to time abnormally large exercises follows from earnings management so as to increase the cash payout of exercises
The Impact of Dual Class Structure on Earnings Management Activities
This paper hypothesizes and finds that firms with dual class structure are less likely to engage in earnings management activities than firms with single class structure. The paper also finds that within the sample of firms with dual class structure, earnings management activities are positively associated with managerial cash flow rights, but marginally and negatively associated with managerial voting rights. In addition, the divergence between voting rights and cash flow rights has a marginally negative impact on earnings management. Finally, in a sample of firms switching from dual class structure to single class structure, earnings management activities increase following the switch. Copyright (c) 2010 Blackwell Publishing Ltd.