The price-taker effect on the valuation of executive stock options

Document Type

Article

Publication Date

3-1-2014

Abstract

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. © 2014 The Southern Finance Association and the Southwestern Finance Association.

Publication Source (Journal or Book title)

Journal of Financial Research

First Page

27

Last Page

54

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