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. Within this setup,we obtain the executive's optimal exercise policy which allows us to analyze the determinants of both, the subjective valuation by executives and the objective valuation by firms. The perpetual ESO is compared with the more realistic finite maturity ESO finding that the approximation is reasonably good. We also use the objective valuation's results for accounting purposes. Further,we analyze the objective valuation distribution when there is uncertainty about the employment shock parameter. Finally, the role of ESOs in the design of executive's incentives is also discussed.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2009-22.
Length: 44 pages
Date of creation: Sep 2009
Date of revision:
Publication status: Published by Ivie
ESO; Risk Aversion; Undiversification; Incentives; FAS 123R.;
Other versions of this item:
- Carmona, Julio & León, Angel & Vaello-Sebastià, Antoni, 2011. "Pricing executive stock options under employment shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 97-114, January.
- 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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