Ignoring Reload Features Can Substantially Understate the Value of Executive Stock Options
43 Pages Posted: 18 Aug 1998
Date Written: July 20, 1998
Statement of Financial Accounting Standards No. 123 recommends that reload options be valued at the time the reload feature is activated and not at the time of the initial grant. We demonstrate that ignoring the reload feature at the time of the initial grant can substantially understate the value of the option granted. In the example we consider the reload feature increases the value of an otherwise similar option by 31 percent. We show how the Binomial Option Pricing Model can be used to value options with a reload feature at the time of the initial grant. In view of the potential significance of the reload feature and the versatility of the Binomial Option Pricing Model, the Financial Accounting Standards Board may wish to reconsider its recommendation regarding the valuation of the reload feature.
JEL Classification: G13, M41, J33
Suggested Citation: Suggested Citation