The valuation of employee stock options : how good is the standard?

  • This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant.

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Author:Peter Raupach
Parent Title (English):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 122
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (122)
Publisher:Univ., Fachbereich Wirtschaftswiss.
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/10/06
Tag:Barrier options; Employee stock options; Executive stock options; Exercise Behavior; Fair value accounting
GND Keyword:Festwert; Teilwert; Neubewertung; Bewertungseinheit; Optionspreistheorie; International Financial Reporting Standards; International Accounting Standards; Aktienoption; Aktienoptionshandel; Aktienoptionsplan
Issue:December 21, 2003
Page Number:30
December 21, 2003 (first draft: January 24, 2003)
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht