Pricing executive stock options under employment shocks
AbstractWe obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Previously, we obtain the executive's optimal exercise policy from the subjective valuation that is necessary for the objective one, or fair value. The perpetual ESO is compared with the true finite maturity ESO finding that the approximation is reasonably good. To illustrate the usefulness of the objective valuation for accounting purposes, we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity. Finally, the role of ESOs in the design of executives' incentives is also discussed.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 35 (2011)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/jedc
Executive stock options Risk aversion Undiversification Incentives FAS123R;
Other versions of this item:
- Ángel León Valle & Antonio Vaello & Julio Carmona, 2009. "Pricing executive stock options under employment shocks," Working Papers. Serie AD 2009-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
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