Article ID: | iaor201523422 |
Volume: | 37 |
Issue: | 1 |
Start Page Number: | 27 |
End Page Number: | 54 |
Publication Date: | Feb 2014 |
Journal: | Journal of Financial Research |
Authors: | Chance Don M, Yang Tung-Hsiao |
Keywords: | management, behaviour |
Because of vesting requirements and the absence of liquidity, executive stock options are valued at less, and often far less, than Black–Scholes–Merton values. We argue that this view assumes the subtle condition that option holders are price takers and therefore cannot influence the payoffs of their options, an assumption that clearly contradicts the very reason for granting options. We build a model to incorporate the executive's effort and perception of his quality, private beliefs, and confidence to show that these options are worth considerably more than previously believed and under some conditions even more than Black–Scholes–Merton values.