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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27569
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| Title: | Stock Option Expense, Forward-Looking Information, and Implied
Volatilities of Traded Options |
| Authors: | Bartov, Eli
Mohanram, Partha S.
Nissim, Doron |
| Keywords: | executive stock options
forward-looking information
SFAS No. 123
implied volatility |
| Issue Date: | Apr-2004 |
| Series/Report no.: | Eli Bartov-09 |
| Abstract: | 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. |
| URI: | http://hdl.handle.net/2451/27569 |
| Appears in Collections: | Accounting Working Papers
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