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Evaluating Incentive Options

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  • 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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Bibliographic Info

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;

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  1. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
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  24. Kole, Stacey R., 1997. "The complexity of compensation contracts," Journal of Financial Economics, Elsevier, vol. 43(1), pages 79-104, January.
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