Managing Employee Stock Option Expense: A Fair Value Approach

Ming Cheng Wu, I. Cheng Lin, Yi Ting Huang

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Owing to special characteristics, classic option pricing models are not well suited to the valuation of employee stock options (ESOs). This paper attempts to conduct a more general fair value estimation based on attaching performance targets to option vesting. Considering a setting that includes factors such as options that may be exercised early at employee discretion, employee exit rates and firm default risk, this paper presents a sensitivity analysis and empirical tests of option value. The results highlight the importance of considering the characteristics of ESOs in the design of performance-vested option plans so as to provide the most attractive incentives for employees.

Original languageEnglish
Pages (from-to)429-438
Number of pages10
JournalAustralian Accounting Review
Volume26
Issue number4
DOIs
Publication statusPublished - 2016 Dec 1

All Science Journal Classification (ASJC) codes

  • Accounting

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