Valuing the Reload Features of Executive Stock Options

34 Pages Posted: 5 Apr 1999 Last revised: 8 Sep 2015

See all articles by Steven J. Huddart

Steven J. Huddart

Pennsylvania State University, University Park - Department of Accounting

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: March 1999

Abstract

Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of any reload feature because, at the time of writing the standard in 1995, the Financial Accounting Standards Board believed it was not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to determine the grant date value of such options. Ignoring the reload feature can substantially understate the value of the option: the reload feature increases the value of an otherwise similar option by 24 percent in the example we consider. 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 the accounting for options with a reload feature.

Suggested Citation

Huddart, Steven J. and Saly, P. Jane and Jagannathan, Ravi, Valuing the Reload Features of Executive Stock Options (March 1999). NBER Working Paper No. w7020. Available at SSRN: https://ssrn.com/abstract=155559

Steven J. Huddart (Contact Author)

Pennsylvania State University, University Park - Department of Accounting ( email )

University Park, PA 16802-3603
United States
814-863-0448 (Phone)

HOME PAGE: http://directory.smeal.psu.edu/sjh11

P. Jane Saly

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

Register to save articles to
your library

Register

Paper statistics

Downloads
45
Abstract Views
1,499
PlumX Metrics