Ignoring Reload Features Can Substantially Understate the Value of Executive Stock Options

43 Pages Posted: 18 Aug 1998

See all articles by P. Jane Saly

P. Jane Saly

University of St. Thomas - Department of Accounting

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: July 20, 1998

Abstract

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

Saly, P. Jane and Jagannathan, Ravi, Ignoring Reload Features Can Substantially Understate the Value of Executive Stock Options (July 20, 1998). Available at SSRN: https://ssrn.com/abstract=110072 or http://dx.doi.org/10.2139/ssrn.110072

P. Jane Saly (Contact Author)

University of St. Thomas - Department of Accounting ( email )

1000 LaSalle Avenue
Mail #TMH343
Minneapolis, MN 55403-2005
United States
651-962-4254 (Phone)
651-962-4710 (Fax)

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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