Executive stock options and corporate report disclosures: managerial power and outrage costs perspectives

This study examines annual report disclosures of executive stock option(s) (ESOs) values by Australian listed companies for periods ending 2002 and 2003. This period was a 'one-time' window of opportunity in which the Australian regulations for disclosing option values in financial statements were unclear, thus allowing preparers some latitude in the application of pricing regimes for the purpose of disclosure. The study further investigates the relation between reported option values and factors known to influence option valuations. Given the growing public concerns regarding director's excessive compensation schemes and the governance of enterprises generally, this study provides evidence that directors have incentives to underreport the value of executive options. The evidence suggests that not only do directors have the power to award themselves excessive compensation, but also the mechanisms to camouflage excessive remuneration to avoid stakeholder dissent. This is the first known Australian study that examines option valuations in the context of managerial power and outrage cost theories.