Disclosed Values of Option Based Compensation: Incompetence, Deliberate Underreporting or the Use of Expected Time to Maturity?

New accounting standards require firms to expense the costs of option-based compensation (OBC), but the associated valuations offer many challenges for firms. Earlier research has documented that firms in the U.S. generally underreport the values of OBC by manipulating the inputs used for valuation purposes. This paper examines the values of OBC disclosed by Danish firms. The results suggest that firms experience some difficulties in valuing OBC, but interestingly, there is no clear evidence of deliberate underreporting. For example, there is no evidence that firms use manipulated values for the Black-Scholes parameters in their valuations. Furthermore, firms determine the expected time to maturity in a way that is generally consistent with the guidelines provided by the new accounting standards.
The findings differ from those of the U.S., but is consistent with the more limited use of OBC and the lower level of attention paid to these values in Denmark. However, the differences can also be due to the fact that several Danish firms do not provide the information required regarding their OBC, which is clearly a very effective way of hiding the true values.