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'The True and Fair View' of Executive Stock Option Valuation

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  • Seppo Ikaheimo
  • Nuutti Kuosa
  • Vesa Puttonen
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    Abstract

    We compare the market values of executive stock option (ESO) trades with their Black & Scholes (1973) model values calculated following the major accounting standards, SFAS No. 123r and IFRS2. Our results show major underpricing compared to the traditional B&S method values. This should be considered while applying SFAS No. 123r and IFRS2 for estimating fair values. Especially time to expiration has a major influence on the undervaluation suggesting that the possibility of a change in corporate structure lowers the cost of ESOs to shareholders.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638180600916267
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 15 (2006)
    Issue (Month): 3 ()
    Pages: 351-366

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    Handle: RePEc:taf:euract:v:15:y:2006:i:3:p:351-366

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    Web page: http://www.tandfonline.com/REAR20

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    References

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    1. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Abudy, Menachem & Benninga, Simon, 2013. "Non-marketability and the value of employee stock options," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5500-5510.
    2. Anne Farrell & Susan Krische & Karen Sedatole, 2007. "Archival and experimental evidence on employees subjective valuations of stock options," Framed Field Experiments 00114, The Field Experiments Website.

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