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An Upper Bound for the Firm's Cost of Employee Stock Options

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  • Haim A. Mozes

Abstract

This paper provides an upper bound to the firm's cost of employee stock options (ESOs). The upper bound depends on the risk and return of the underlying stock and on all other investment opportunities that are available, but it does not depend on employees' risk preferences or wealth. The only assumption that is required is that employees do not hedge their ESOs. One result of the model is that the overstatement from using options-pricing models for ESOs is likely to be greatest for firms with high unsystematic risk, such as small, high-tech firms in the start-up growth stages.

Suggested Citation

  • Haim A. Mozes, 1995. "An Upper Bound for the Firm's Cost of Employee Stock Options," Financial Management, Financial Management Association, vol. 24(4), Winter.
    • Handle: RePEc:fma:fmanag:mozes95
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    Cited by:

    1. Hemmer, Thomas & Matsunaga, Steve & Shevlin, Terry, 1996. "The influence of risk diversification on the early exercise of employee stock options by executive officers," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 45-68, February.
    2. 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.

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