Valuing executive stock options: performance hurdles, early exercise and stochastic volatility
AbstractAccounting standards require companies to assess the fair value of any stock options granted to executives and employees. We develop a model for accurately valuing executive and employee stock options, focusing on performance hurdles, early exercise and uncertain volatility. We apply the model in two case studies and show that properly computed fair values can be significantly lower than traditional Black-Scholes values. We then explore the implications for pay-for-performance sensitivity and the design of effective share-based incentive schemes. We find that performance hurdles can require a much greater fraction of total compensation to be a fixed salary, if pre-existing incentive levels are to be maintained. Copyright (c) 2008 The Authors. Journal compilation (c) 2008 AFAANZ.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Accounting and Finance Association of Australia and New Zealand in its journal Accounting & Finance.
Volume (Year): 48 (2008)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0810-5391
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Len, Angel & Vaello-Sebasti, Antoni, 2009. "American GARCH employee stock option valuation," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1129-1143, June.
- Carmona, Julio & León, Angel & Vaello-Sebastiá, Antoni, 2011.
"Does Stock Return Predictability Affect ESO Fair Value?,"
QM&ET Working Papers
11-2, Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica, revised 16 Jan 2012.
- Carmona, Julio & León, Angel & Vaello-Sebastià, Antoni, 2012. "Does stock return predictability affect ESO fair value?," European Journal of Operational Research, Elsevier, vol. 223(1), pages 188-202.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.