Abstract

http://ssrn.com/abstract=1623467
 
 

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Ex Post Estimation Error in CEO Option Grants


Mark C. Anderson


Haskayne School of Business

Volkan Muslu


Bauer College of Business University of Houston

September 2013

AAA 2011 Management Accounting Section (MAS) Meeting Paper

Abstract:     
The value of option grants to CEOs is defined in two different ways. Fair values are grant-date estimates of expected values from future option contract settlement. Payouts from exercise are realized values from option contract settlement. We refer to the cumulative difference between the fair values and payouts over an individual CEO’s tenure as “ex post estimation error” (EPEE), because it represents information about option contract settlement that is not available at the grant dates. We find that the average EPEE amounts to 27% of the fair value of option grants among all ExecuComp CEOs from 1992 to 2009, contrary to beliefs that fair values are unbiased or they understate option-related payments that CEOs take home. We find that EPEE also varies with agency relations between CEOs and shareholders. EPEE is significantly higher in companies with outsider CEOs and in companies with high institutional ownership. These findings imply that agency relations between CEOs and shareholders influence option contract settlement and that pay comparisons that ignore option contract settlement may be misleading.

(This paper was formerly titled "On the Quality of CEO Option Pay Estimates")

Number of Pages in PDF File: 43

Keywords: CEO compensation, stock options, outsider CEOs, option exercise, institutional shareholders

JEL Classification: J33, J41, G32

working papers series


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Date posted: June 12, 2010 ; Last revised: October 15, 2013

Suggested Citation

Anderson, Mark C. and Muslu, Volkan, Ex Post Estimation Error in CEO Option Grants (September 2013). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: http://ssrn.com/abstract=1623467 or http://dx.doi.org/10.2139/ssrn.1623467

Contact Information

Mark C. Anderson
Haskayne School of Business ( email )
2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-3926 (Phone)
Volkan Muslu (Contact Author)
Bauer College of Business University of Houston ( email )
Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States
713 7434924 (Phone)
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