The accuracy of disclosures for complex estimates: Evidence from reported stock option fair values

Brian Bratten, Ross Jennings, Casey M. Schwab

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


In this study, we exploit the unique reporting requirements for employee stock options to provide large sample evidence on the accuracy of footnote disclosures related to a specific complex estimate, the fair value of options granted. We first document the frequency and magnitude of differences between (1) the reported weighted-average fair value of options granted and (2) the calculated option fair value using the disclosed weighted-average valuation model inputs and the Black-Scholes option pricing model. In a sample of 23,358 firm-year observations between 2004 and 2011, we find that 23.9 percent have reported and calculated option fair values that differ by more than ten percent, and that these differences are sticky and are frequently significant as a percentage of net income. We also find that fair value differences are larger for firms that (1) exhibit anomalous stock option footnote disclosures that likely result from disclosure errors, (2) have more complex and hence error-prone stock option programs, and (3) have lower quality financial reporting. Taken together this evidence is consistent with large fair value differences that are primarily due to unintentional errors in the stock option footnote disclosures. To document the consequences of these fair value differences, we provide evidence that errors in the reported fair values prevent financial statement users from using the reported values to reliably estimate future stock option expense for many firms. Consistent with this result, we also find that analyst forecasts are less accurate and more disperse for firms with larger fair value differences.

Original languageEnglish
Pages (from-to)32-49
Number of pages18
JournalAccounting, Organizations and Society
StatePublished - Jul 1 2016

Bibliographical note

Funding Information:
We gratefully acknowledge helpful comments from Mark Peecher (editor), two anonymous reviewers, Steve Baginiski, John Campbell, Preeti Choudhary, Dain Donelson, Theodore Goodman, Jackie Hammersley, John McInnis, Laura Wang, Teri Yohn, Yong Yu, and workshop participants at Miami University, the University of Toronto, the 2014 FARS midyear meeting, and the 2014 AAA annual meeting. Brian Bratten acknowledges the financial support of the Von Allmen School of Accountancy and the Gatton College of Business and Economics. Ross Jennings acknowledges the financial support of the Deloitte & Touche Professorship of Accounting and the McCombs School of Business. Casey Schwab acknowledges the financial support of the Terry College of Business and the J.M. Tull School of Accounting. We also acknowledge the excellent research assistance of Philip Chung, Anne Ehinger, Ying Huang, Jonathan Ross, and Russell Williamson.

Publisher Copyright:
© 2015 Elsevier Ltd


  • Complex estimates
  • Disclosure quality
  • Employee stock options
  • Fair values

ASJC Scopus subject areas

  • Accounting
  • Sociology and Political Science
  • Organizational Behavior and Human Resource Management
  • Information Systems and Management


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