Determinants of Incomplete Disclosure

I begin by first estimating pooled probit regressions in order to determine which compa-nies do not provide enough information on their ESO to calculate a fair value. For this I code companies that provide at a minimum the grant date, the fair value, the exercise

conditions, and the maturity with a one.⁹⁹ Results for this regression are presented in Table 5.6.

Model (1) contains all managerial power and managerial incentive variables as well as the exclusion restriction. As expected, the higher the percentage held by institutional investors, the more likely it is that a company provides disclosure of fair values and maturities, the absolute minimum in order to reproduce the option valuation. CEO tenure is also positive and significant at a five percent level, indicating that the longer a CEO serves in that capacity the better the disclosure becomes. This speaks against the idea that longer-serving CEOs also become self-serving CEOs with an incentive to hide remuneration disclosure. The effect of the number of options granted, which is likewise significant at the five percent level, works in the opposite direction. The greater the magnitude of the option expense is, the less likely the companies are to provide full disclosure, confirming previous studies on this effect. IFRS experience also leads to better disclosure, as the sign on the coefficient is positive and statistically significant.

This points to the notion that it might take some time for companies to fully understand the idea of the new accounting rules and the more experience they have in this matter, the more likely they are to correctly comply with what the standards ask of them.

I submit these initial results to a several robustness checks. First, as Table 5.2 showed that there was some variety in the degree to which companies adhered to the publication requirements of IFRS 2, I include year dummies in order to filter out any time effects.

The results of model (2) are almost unchanged. The same four variables are significant and for both CEO tenure and the IFRS experience dummy, the significance level has increased, confirming the conjecture that large option grants lead to weaker disclosure while institutional investors, CEO tenure, and IFRS experience improve it. The pseudo R² has also increased, indicating a slightly better model fit.

Next, I check for the effect of plan design by including the type dummy. Again, the same four variables show up as significant in the regression: the more of the shares are held by institutional investors and the longer a CEO has that position, the more likely it is that a company will disclose appropriately. This likelihood is also again increased by the IFRS experience and reduced when companies give out more options. Conditional

99 As stated before, in the case of virtual stock options, options have to be revalued at the end of each fiscal year. So if the grant date is not given, I value the options at the date at which the fiscal year ends.

Table 5.6: 1st stage Heckman: participation regression

This table reports the probit participation regression with p-values based on cluster-robust standard errors given in parentheses for models (1) through (3). The dependent variable is a binary variable that is one whenever companies report enough to calculate a fair value for the option grant and zero otherwise.

Model (2) includes year dummies to check for time effects, model (3) includes the type dummy, and model (4) is estimated as a random-effects panel model to check for unobserved heterogeneity and p-values are bootstrapped.

on these effects, the type of plan has no explanatory power, suggesting that it is not so much the plan design that affects the disclosure, but the other four characteristics.

After having checked for time and plan effects, I also control for unobserved heterogeneity by specifying a random-effects panel model (model 4). Fixed-effects produce inconsistent estimates in a discrete choice model and with the rather small sample size, they also lead to a loss in degrees of freedom. Results confirm that the incentives to reduce disclosure are a major factor in explaining incomplete disclosure, as the coefficient for number of options granted is now significant at a one percent level. Also, IFRS experience is significantly positive at a five percent level again.

All in all the results suggest that the drivers to (not) disclose in Germany are similar to those in other studies. Institutional investors who represent a controlling mechanism act against deficient financial reports while managers with incentives to hide information, as measured by the magnitude of the ESO grant, tend to not provide the necessary disclosure of the valuation parameters. Longer tenured CEOs have a positive influence on the likelihood of disclosure which could be due to greater experience. Finally, if companies have already applied IFRS prior to the first option valuation, they are less likely to withhold some or all the relevant information on the valuation. This may point to the fact that not all deficient reporting may be caused by a deliberate obfuscation, but rather by inexperience with the new accounting rules. Year dummies and the plan dummy were not significant, indicating that they are not drivers for non-disclosure.