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New accounting standards require firms to expense the costs of option-based compensation (OBC), but the associated valuations offer many challenges for firms. Earlier research has documented that firms in the U.S. generally underreport the values of OBC by manipulating the inputs used for valuation purposes. This paper examines the values of OBC disclosed by Danish firms. The results suggest that firms experience some difficulties in valuing OBC, but interestingly, there is no clear evidence of deliberate underreporting. For example, there is no evidence that firms use manipulated values for the Black-Scholes parameters in their valuations. Furthermore, firms determine the expected time to maturity in a way that is generally consistent with the guidelines provided by the new accounting standards.The findings differ from those of the U.S., but is consistent with the more limited use of OBC and the lower level of attention paid to these values in Denmark. However, the differences can also be due to the fact that several Danish firms do not provide the information required regarding their OBC, which is clearly a very effective way of hiding the true values.

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This paper studies the impact of debt governance on …rms' risk shifting behavior. We construct …rm-level debt governance indices using corporate bond indenture provisions, and a market-based risk shifting measure estimated using a contingent-claim framework. We …rst document that …rms with strong debt governance subsequently lower business risk relative to their industry peers, and this relationship mainly exists among …rms with high default probability. Further evidence suggests that debt governance plays an important role in mitigating the impact of managerial risk-taking incentives on risk shifting. Higher sensitivity of CEO wealth to stock volatility (Vega) is signi…cantly positively related to risk shifting, but this e¤ect is signi…cantly weakened when strong debt governance is in place. Also, bondholders appear to bene…t from the impact of debt governance on risk shifting. Higher Vega is associated with higher credit spreads for bonds under weak debt governance. Under strong debt governance, higher Vega is associated with signi…cantly lower credit spreads. JEL classi…cation: G13, G30, G32, J33Keywords: Risk shifting, default risk, debt governance, managerial incentiveThe authors are grateful for helpful comments from Kose John and Peter Tind Larsen. We would also like to thank seminar participants at University of Aarhus. Any remaining errors are the authors'responsibility.