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CEO compensation, Option Incentives, and Information Disclosure

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>2001
<mark>Journal</mark>Review of Financial Economics
Issue number3
Volume10
Number of pages27
Pages (from-to)251-277
Publication StatusPublished
<mark>Original language</mark>English

Abstract

This paper examines the impact of informationdisclosure on the valuation of CEOoptions and the incentives created by those options. Prior executive compensation research in the US has made assumptions about key input variables that can affect the calculation of option values and financial incentives. Accordingly, biases may have ensued due to incomplete informationdisclosure about noncurrent option grants. Using new data on a sample of UK CEOs, we value executive option holdings and incentives for the first time and estimate the levels of distortion created by the less than complete US-style disclosure requirements. We also investigate the levels of distortion in the UK for the minority of companies that choose to reveal only partial information. Our results suggest that there have to date been few economic biases arising from less than complete informationdisclosure. Furthermore, we demonstrate that researchers using US data, who made reasonable assumptions about the inputs of noncurrent option grants, are unlikely to have made significant errors when calculating CEO financial incentives or option wealth. However, the recent downturn in the US stock market could result in the same assumptions, producing exaggerated incentive estimates in the future.