Companies' Modest Claims About the Value of CEO Stock Option Awards

Abstract

This paper analyzes companies' disclosure of CEO stock option values in compliance with recent changes in the SEC s regulations for reporting executive compensation data to stockholders. Results suggest that companies exploit the flexibility of the SEC s disclosure regulations to reduce the apparent value of managers compensation. Companies shorten the expected lives of stock options and independently apply discounts to the Black-Scholes formula. Theoretical support for these adjustments is often lacking, and companies universally ignore reasons that the Black-Scholes formula might underestimate the value of executive stock options, but also provide a means of forecasting compliance with controversial FASB proposals to require disclosure of the implicit compensation expense represented by executive stock option awards.