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Evaluating Incentive Options

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Author Info
Wei Xiong
Ronnie Sircar
Abstract

We provide an analytical and flexible framework to evaluate incentive options. Our model not only considers vesting periods and trading and hedging restrictions on the holders, but also specifically includes provisions of reloading and resetting to capture the fact that firms tend to grant more options after existing options are either exercised or become deep out of the money. By treating the incentive option as a flow of barrier options, we are able to obtain a near-explicit formula for the option value. Our model allows us to discuss many issues related to incentive options such as their issuing cost, exercising strategies, and induced incentives. Especially, we highlight some significant interactions among different features of incentive options

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 253.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:253

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Related research
Keywords: Executive Stock Options; Incentives; Resetting and Reloading; Subjective Valuation;

Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

This paper has been announced in the following NEP Reports:

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    Other versions:
  8. Philip H. Dybvig & Mark Loewenstein, 2003. "Employee Reload Options: Pricing, Hedging, and Optimal Exercise," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(1), pages 145-171.
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  16. Acharya, Viral V. & John, Kose & Sundaram, Rangarajan K., 2000. "On the optimality of resetting executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 65-101, July. [Downloadable!] (restricted)
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  17. Brenner, Menachem & Sundaram, Rangarajan K. & Yermack, David, 2000. "Altering the terms of executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 103-128, July. [Downloadable!] (restricted)
    Other versions:
  18. Brian J. Hall & Thomas A. Knox, 2002. "Managing Option Fragility," NBER Working Papers 9059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Kahl, Matthias & Liu, Jun & Longstaff, Francis A., 2003. "Paper millionaires: how valuable is stock to a stockholder who is restricted from selling it?," Journal of Financial Economics, Elsevier, vol. 67(3), pages 385-410, March. [Downloadable!] (restricted)
  20. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
    Other versions:
  21. Gao, Bin & Huang, Jing-zhi & Subrahmanyam, Marti, 2000. "The valuation of American barrier options using the decomposition technique," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1783-1827, October. [Downloadable!] (restricted)
    Other versions:
  22. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September. [Downloadable!] (restricted)
  23. Carr, Peter, 1998. "Randomization and the American Put," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(3), pages 597-626.
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