Executive stock options differ from exchange-traded options because of vesting and portability restrictions. Executive departure from the firm forces early exercise, reducing the value of executive options. Current methodology calculates the option value by multiplying the Black-Scholes option price by the departure probability. This ignores the possibility that executive departure is less likely when stock price is high, and thus is correlated with the stock price. We show that this correlation implies a substantial increase in option values. A similar situation occurs in performance-based option packages, where the actual number of options granted depends on stock performance.

We extend Healy (1985) by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980–1990 period. Contrary to Healy, we find that when earnings before discretionary accruals fall below the lower bound, managers select income-increasing discretionary accruals (and vice versa). We believe that our results are more consistent with the income smoothing hypothesis than with Healy's bonus hypothesis. However, mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results.

This article hypothesizes that the level of managerial ownership affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments. The hypothesis draws on the theory of the firm, and exploits: (1) separation of ownership from control of economic decisions, (2) the extent and consequences of accounting-based contractual constraints, and (3) managers' incentives in selecting and applying accounting techniques. Results show managerial ownership is positively associated with earnings' explanatory power for returns and inversely related to the magnitude of accounting accrual adjustments. Moreover, ownership is less important for regulated corporations, suggesting regulation monitors managers' accounting choices.