Evidence on differences between Recognition and Disclosure: A Comparison of Inputs to Estimate Fair Values of Employee Stock Options

Abstract

I investigate reliability differences across recognition and disclosure regimes to shed light on differing incentives and reporting of employee stock option (ESO) fair values. I compare ESO fair values based on firm-reported inputs with ESO fair values based on benchmark inputs, estimated following authoritative guidance. On average, I find opportunism increases with recognition as compared with disclosure, and that it is associated with incentives to manage earnings. Despite the increase in opportunism, I find that accuracy does not decline for recognizers, and that accuracy differs across voluntary and mandatory recognition.

Keywords: reliability, input assumptions, FAS 123, FAS 123-R, recognition, disclosure

JEL Classification: J33, M41, M44, M45