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On Valuing Employee Stock Option Plans with the Requisite Service Period Requirement


  • Thomas A. Rhee

    (California State University, Long Beach)


This paper examines issues involving employee stock option plans as a part of employee compensation. In particular, employee stock options requiring a requisite service period are viewed as an option on options and hence, a compound option, as the employee’s future market wage rate is unknown. Non-transferability of employee stock options is overcome by the well-known put-call parity theorem. Difficulties arise, however, if a firm is privately held. The paper derives a simple formula to value equities for privately held firms.

Suggested Citation

  • Thomas A. Rhee, 2006. "On Valuing Employee Stock Option Plans with the Requisite Service Period Requirement," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 11(1), pages 39-50, Spring.
  • Handle: RePEc:pep:journl:v:11:y:2006:i:1:p:39-50

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    References listed on IDEAS

    1. Chen, Tain-Jy, 1992. "Determinants of Taiwan's direct foreign investment : The case of a newly industrializing country," Journal of Development Economics, Elsevier, vol. 39(2), pages 397-407, October.
    2. Li, Jiatao & Guisinger, Stephen, 1991. "How well do foreign firms compete in the United States?," Business Horizons, Elsevier, vol. 34(6), pages 49-53.
    3. Robert J. Newman & Geoffrey K. Turnbull, 1991. "The Interindustry Distribution Of Effective Tax Rates For A State Corporate Income Tax," The Review of Regional Studies, Southern Regional Science Association, vol. 21(1), pages 65-78, Spring.
    4. William H Davidson, 1980. "The Location of Foreign Direct Investment Activity: Country Characteristics and Experience Effects," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 11(2), pages 9-22, June.
    5. Feltenstein, Andrew & Shah, Anwar, 1993. "General Equilibrium Effects of Taxation on Investment in a Developing Country: The Case of Pakistan," Public Finance = Finances publiques, , vol. 48(3), pages 366-386.
    6. Xiaming Liu & Haiyan Song & Yingqi Wei & Peter Romilly, 1997. "Country characteristics and foreign direct investment in China: A panel data analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(2), pages 313-329, June.
    7. Zhang, Kevin Honglin, 1999. "Foreign Direct Investment and Economic Growth: Evidence from Ten East Asian Economies," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 52(4), pages 517-535.
    8. repec:sae:niesru:v:160:y::i:1:p:87-99 is not listed on IDEAS
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    More about this item


    Stock Options; Compensation; Incentives;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects


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