How to Value Employee Stock Options

Posted: 13 Feb 2004

See all articles by John C. Hull

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Abstract

One of the arguments often used against expensing employee stock options is that calculating their fair value at the time they are granted is very difficult. This article presents an approach to calculating the value of employee stock options that is practical, easy to implement, and theoretically sound. It explicitly considers the vesting period, the possibility that employees will leave the company during the life of the option, the inability of employees to trade their options, and the relevant dilution issues. This approach is an enhancement of the approach suggested by the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 because it does not require an arbitrary reduction in the life of the option to allow for early exercise caused by the inability of employees to trade their options.

Keywords: Equity Investments: fundamental analysis and valuation models; Financial Statement Analysis: accounting and financial reporting issues

JEL Classification: G13, J33, M41, M44

Suggested Citation

Hull, John C. and White, Alan, How to Value Employee Stock Options. Available at SSRN: https://ssrn.com/abstract=500062

John C. Hull (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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