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An IFRS 2 and FASB 123 (R) Compatible Model for the Valuation of Employee Stock Options

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  • Manuel Ammann

    ()

  • Ralf Seiz

    ()

Abstract

In this paper, we show how employee stock options can be valued under the new reporting standards IFRS 2 and FASB 123 (revised) for share-based payments. Both standards require companies to expense employee stock options at fair value. We propose a new valuation model, referred to as Enhanced American model, that complies with the new standards and produces fair values often lower than those generated by traditional models such as the Black–Scholes model or the adjusted Black–Scholes model. We also provide a sensitivity analysis of model input parameters and analyze the impact of the parameters on the fair value of the option. The valuation of employee stock options requires an accurate estimation of the exercise behavior. We show how the exercise behavior can be modeled in a binomial tree and demonstrate the relevance of the input parameters in the calibration of the model to an estimated expected life of the option. Copyright Swiss Society for Financial Market Research 2005

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File URL: http://hdl.handle.net/10.1007/s11408-005-6458-2
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Bibliographic Info

Article provided by Springer in its journal Financial Markets and Portfolio Management.

Volume (Year): 19 (2005)
Issue (Month): 4 (December)
Pages: 381-396

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Handle: RePEc:kap:fmktpm:v:19:y:2005:i:4:p:381-396

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Web page: http://www.springerlink.com/link.asp?id=119763

Related research

Keywords: employee stock options; executive compensation; IFRS 2; FASB 123 (R);

References

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  1. Cuny, Charles J. & Jorion, Philippe, 1995. "Valuing executive stock options with endogenous departure," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 193-205, September.
  2. Brian J. Hall & Kevin J. Murphy, 2000. "Stock Options for Undiversified Executives," NBER Working Papers 8052, National Bureau of Economic Research, Inc.
  3. Detemple, Jerome & Sundaresan, Suresh, 1999. "Nontraded Asset Valuation with Portfolio Constraints: A Binomial Approach," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 835-72.
  4. Jennifer Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-10, New York University, Leonard N. Stern School of Business-.
  5. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  6. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
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Cited by:
  1. Douglas Cumming & Sofia Johan, 2006. "Provincial preferences in private equity," Financial Markets and Portfolio Management, Springer, vol. 20(4), pages 369-398, December.
  2. Cumming, D. & Johan, S.A., 2005. "Advice and monitoring in venture finance," Discussion Paper 2005-003, Tilburg University, Tilburg Law and Economic Center.

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