Changes in SEC Disclosure Rules for Executive Stock Options: Implications for Valuation

Abstract

Outstanding (unexercised and unexpired) executive stock options held by top managers of public corporations are an important indicator of accumulated compensation motivating their near-term behavior. In the process of radically overhauling disclosure requirements relating to executive compensation in the proxy rules in 1983, the SEC discontinued the requirement of disclosure of any particulars relating to outstanding executive stock options held by top managers. This has resulted in imprecisions in the measurement of key particulars of outstanding executive stock options of top managers since 1984. Although we have suggested some procedures for consistent valuation of these options over time, the SEC has since reintroduced the requirements regarding disclosure of unexercised and unexpired executive stock options in annual proxy statements, so that investors remain aware of the full extent of top managers' wealth.