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Pricing executive stock options under employment shocks

Author

Listed:
  • Ángel León Valle

    (Universidad de Alicante)

  • Antonio Vaello

    (Universitat de les Illes Balears)

  • Julio Carmona

    (Universidad de Alicante)

Abstract

We 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.

Suggested Citation

  • Ángel León Valle & Antonio Vaello & Julio Carmona, 2009. "Pricing executive stock options under employment shocks," Working Papers. Serie AD 2009-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2009-22
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    References listed on IDEAS

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    Cited by:

    1. Eikseth, Hans Marius & Lindset, Snorre, 2011. "Backdating executive stock options--An ex ante valuation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1731-1743, October.
    2. Sonia Oreffice & Climent Quintana, 2009. "Anthropometry and Socioeconomics in the Couple: Evidence from the PSID," Working Papers 2009-22, FEDEA.
    3. Xu, Guangli & Shao, Xinjian & Wang, Xingchun, 2019. "Analytical valuation of power exchange options with default risk," Finance Research Letters, Elsevier, vol. 28(C), pages 265-274.
    4. Colwell, David B. & Feldman, David & Hu, Wei, 2015. "Non-transferable non-hedgeable executive stock option pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 161-191.
    5. Tim Leung & Yang Zhou, 2020. "A Top-Down Approach For The Multiple Exercises And Valuation Of Employee Stock Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-29, March.
    6. Wang, Xingchun, 2021. "The values and incentive effects of options on the maximum or the minimum of the stock prices and market index," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    7. Wang, Xingchun, 2018. "Valuing executive stock options under correlated employment shocks," Finance Research Letters, Elsevier, vol. 27(C), pages 38-45.

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    More about this item

    Keywords

    ESO; Risk Aversion; Undiversification; Incentives; FAS 123R.;
    All these keywords.

    JEL classification:

    • 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 - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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