Excessive Discretion in Corporate Disclosure? Evidence from Option Valuation

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 parameters. Accordingly, we take into account a number of justifiable measures and we study when firms announce parameter values ``outside the bounds'', which cannot be obtained by any combination of justifiable measures. With this new methodology, we find that underreporting of the volatility rate, which understates the cost of stock-options, is more likely in firms where executive compensation is ``excessive'', and that the dividend yield reported is informative about the future dividend yield, especially in cases of overreporting.