Although prior research presents employees’ subjective valuations of their stock options as being either below or above firms’ opportunity cost of issuing options, we examine subjective valuations in terms of their distribution around cost. We argue that variation of subjective valuations within this distribution is at least partly attributable to employees’ failure to fully incorporate the time-value component of options and their tendency to, instead, anchor on readily-available components of option value. Using both “real-world” and experiment data, we show that a significant proportion of both employees (30 percent) and experiment participants (47 percent) anchor on three readily-available values, two of which lie below cost (zero value, intrinsic value) and one of which lies above (stock price). We further find that a stock option education program aimed at mitigating the tendency to disregard the time-value component leads to a significant change in valuations (in terms of both median values and dispersion) and lower reliance on simple anchors. Education in the form of cognitive feedback has a greater effect on subjective valuations of additional options with differing characteristics as compared to education in the form of outcome feedback on the original option holdings.

We study changes in borrower accounting recognition surrounding initiation of loans requiring the provision of aging schedules to the lender. Our purpose is to understand how scrutiny by lenders of underlying transactions affects financial reporting incentives. We find that allowance for doubtful accounts increases significantly after loan initiation controlling for current and future write-offs, receivable turnover, and the beginning allowance balance. This increase is more pronounced for loans with increased monitoring frequency. We also find that write-offs are less persistent following implementation of bank monitoring, consistent with increased timeliness. Further study of the customer base finds customer concentration declines and credit quality of largest customers improves after initiation of borrowing base loans. Lastly, we find borrowers increase the frequency of allowance-for-doubtful-accounts disclosure in their quarterly financial statements after loan initiation. Our results confirm two notions. Banks add to the oversight that already exists for public, audited companies and banks influence borrowers to adopt more conservative accounting policies. JEL: G14, G21, G24, G28