Excessive Discretion in Corporate Disclosure? Evidence from Option Valuation

Abstract

We propose a new methodology to identify non-compliance with FASB guidance with respect to the dividend yield and the volatility rate for stock option valuation disclosures. The FASB gives firms some flexibility in choosing these parameter values. Accordingly, we take into account several justifiable measures consistent with FASB guidance. We study when firms report ``noncompliant'' parameter values, which cannot be obtained by any combination of justifiable measures. A substantial minority of firms reports noncompliant parameter values, especially with regards to the volatility rate. Moreover, noncompliant reports of the volatility rate are not primarily driven by information transmission. On the contrary, both compliant and noncompliant reports of the dividend yield are incrementally informative about the future dividend yield.