A General Framework for Evaluating Executive Stock Options

40 Pages Posted: 21 Aug 2003

See all articles by Ronnie Sircar

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2004

Abstract

Motivated by recent recommendations by both European and American accounting standards boards that executive stock options be expensed in firms' statements, we provide an analytical and flexible framework for their evaluation. Our approach takes into account the vesting period, American style, resetting and reloading provisions that are features of many options programs, and also considers the trading restriction on executives. We identify a recursive structure in the stream of options that are granted to the executive over the course of her employment. By exploiting this, we are able to obtain a near-explicit formula for the option value. This enablesus to discuss the joint effects of the different features on the exercising strategies and firms' granting cost. Especially, we highlight some significant interactions among these features.

Keywords: Executive stock options; Reloading; Repricing; Trading and hedging restrictions; Vesting period

JEL Classification: G13, J33, G30, M41

Suggested Citation

Sircar, Ronnie and Xiong, Wei, A General Framework for Evaluating Executive Stock Options (February 2004). Available at SSRN: https://ssrn.com/abstract=420820 or http://dx.doi.org/10.2139/ssrn.420820

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering ( email )

Princeton, NJ 08544
United States

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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