Stock Option Expense, Forward-Looking Information, and Implied Volatilities of Traded Options

摘要: Prior research generally finds that firms underreport option expense by managing assumptions underlying valuation (e.g. they shorten the expected lives), but it fails to document management of a key assumption, one concerning stock-price volatility. Using new methodology, we address two questions: (1) To what extent do companies follow guidance in FAS 123 and use forward looking information addition readily available historical volatility estimating volatility? (2) What determines cross-sectional variation reliance on information? We find both forward-looking deriving also find, however, is limited situations where this results reduced thus smaller expense. interpret finding as managers opportunistically discretion afforded 123. In support interpretation, managerial incentives play role opportunism.