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Valuing the Reload Features of Executive Stock Options

Author

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  • Steven Huddart
  • Ravi Jagannathan
  • Jane Saly

Abstract

Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of any reload feature because, at the time of writing the standard in 1995, the Financial Accounting Standards Board believed it was not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to determine the grant date value of such options. Ignoring the reload feature can substantially understate the value of the option: the reload feature increases the value of an otherwise similar option by 24 percent in the example we consider. In view of the potential significance of the reload feature and the versatility of the Binomial Option Pricing Model, the Financial Accounting Standards Board may wish to reconsider the accounting for options with a reload feature.

Suggested Citation

  • Steven Huddart & Ravi Jagannathan & Jane Saly, 1999. "Valuing the Reload Features of Executive Stock Options," NBER Working Papers 7020, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7020
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    References listed on IDEAS

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    1. Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 601-627.
    2. repec:bla:joares:v:36:y:1998:i:2:p:231-255 is not listed on IDEAS
    3. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
    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.
    5. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    6. Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
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    Cited by:

    1. Ellen K. Stoddart, 2001. "Options in Valuing Equity Compensation Benefits," Australian Accounting Review, CPA Australia, vol. 11(24), pages 49-61, July.
    2. repec:dau:papers:123456789/9550 is not listed on IDEAS
    3. Maug, Ernst & Dittmann, Ingolf, 2007. "Lower Salaries and No Options: The Optimal Structure of Executive Pay," Sonderforschungsbereich 504 Publications 07-41, Sonderforschungsbereich 504, Universit├Ąt Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    4. Sircar, Ronnie & Xiong, Wei, 2007. "A general framework for evaluating executive stock options," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2317-2349, July.
    5. Johnson, Shane A. & Tian, Yisong S., 2000. "The value and incentive effects of nontraditional executive stock option plans," Journal of Financial Economics, Elsevier, vol. 57(1), pages 3-34, July.
    6. Wei Xiong & Ronnie Sircar, 2004. "Evaluating Incentive Options," Econometric Society 2004 North American Winter Meetings 253, Econometric Society.
    7. Dai, Min & Kwok, Yue Kuen, 2008. "Optimal multiple stopping models of reload options and shout options," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2269-2290, July.
    8. Brian J. Hall & Thomas A. Knox, 2002. "Managing Option Fragility," NBER Working Papers 9059, National Bureau of Economic Research, Inc.
    9. repec:dau:papers:123456789/13098 is not listed on IDEAS

    More about this item

    JEL classification:

    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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