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

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  • Seppo Ikaheimo
  • Nuutti Kuosa
  • Vesa Puttonen

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.

Suggested Citation

  • Seppo Ikaheimo & Nuutti Kuosa & Vesa Puttonen, 2006. "'The True and Fair View' of Executive Stock Option Valuation," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 351-366.
  • Handle: RePEc:taf:euract:v:15:y:2006:i:3:p:351-366 DOI: 10.1080/09638180600916267
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    References listed on IDEAS

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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. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
    3. Tian, Yisong S., 2004. "Too much of a good incentive? The case of executive stock options," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1225-1245, June.
    4. 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 637-654, May-June.
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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.
    3. Lambert Jerman, 2015. "Les Enjeux De L'Application Des Normes Ias-Ifrs : L'Etude Des Preparateurs Des Comptes, Une Perspective De Recherche Encore Inexploree," Post-Print hal-01188736, HAL.

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