An IFRS 2 and Fasb 123 (R) Compatible Model for the Valuation of Employee Stock Options

Financial Markets and Portfolio Management, Vol. 19, No. 4, pp. 381-396, 2005

Posted: 30 Jan 2006

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance

Abstract

In this paper, we show how employee stock options can be valued under the new reporting standards IFRS 2 and FASB 123 (revised) for share-based payments. Both standards require companies to expense employee stock options at fair value. We propose a new valuation model, referred to as Enhanced American model, that complies with the new standards and produces fair values often lower than those generated by traditional models such as the Black-Scholes model or the adjusted Black-Scholes model. We also provide a sensitivity analysis of model input parameters and analyze the impact of the parameters on the fair value of the option. The valuation of employee stock options requires an accurate estimation of the exercise behavior. We show how the exercise behavior can be modeled in a binomial tree and demonstrate the relevance of the input parameters in the calibration of the model to an estimated expected life of the option.

Suggested Citation

Ammann, Manuel and Seiz, Ralf, An IFRS 2 and Fasb 123 (R) Compatible Model for the Valuation of Employee Stock Options. Financial Markets and Portfolio Management, Vol. 19, No. 4, pp. 381-396, 2005 . Available at SSRN: https://ssrn.com/abstract=877824

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ralf Seiz (Contact Author)

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

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