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Accounting for Risk Aversion and Other Idiosyncrasies in the Valuation of Employee Stock Options
by
Tim Leung
Princeton University
Coauthors: Ronnie Sircar
We present a valuation framework that captures the main characteristics of employee stock options (ESOs), which financial regulations now require to be expensed in firms' accounting statements. The value of these options is much less than Black-Scholes prices for corresponding market-traded options due to the suboptimal exercising strategies of the holders and other idiosyncrasies of ESOs. This leads to the study of a portfolio optimization problem with multiple optimal stopping opportunities. We solve the problem and analyze the combined effect of different factors on the granting cost.
Date received: February 21, 2007
Copyright © 2007 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cata-82.