Pricing executive stock optons under employment shocks

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Title: Pricing executive stock optons under employment shocks
Authors: Carmona-Martínez, Julio | León Valle, Ángel M. | Vaello-Sebastià, Antoni
Research Group/s: Finanzas de Mercado y Econometría Financiera
Center, Department or Service: Universidad de Alicante. Departamento de Fundamentos del Análisis Económico
Keywords: Executive stock options | Risk aversion | Undiversification | Incentives | FAS123R
Issue Date: 13-Aug-2010
Publisher: Elsevier
Citation: Journal of Economic Dynamics and Control. 2011, 35(1): 97-114.
Abstract: We obtain explicit expressions for the subjective, objective and market value of perpetual executive stock options (ESOs) under exogenous employment shocks driven by an independent Poisson process. Previously, we obtain the executive's optimal exercise policy from the subjective valuation that is necessary for the objective one, or fair value. The perpetual ESO is compared with the true finite maturity ESO finding that the approximation is reasonably good. To illustrate the usefulness of the objective valuation for accounting purposes, we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity. Finally, the role of ESOs in the design of executives’ incentives is also discussed.
Sponsor: Spanish Ministry for Science and Innovation through the Grant SEJ 2004-05815; Spanish Ministry for Science and Innovation through the Grant ECO2008-02599/ECO; Spanish Ministry for Science and Innovation through the Grant ECO2010-18567.
ISSN: 0165-1889 (Print) | 1879-1743 (Online)
DOI: 10.1016/j.jedc.2010.08.002
Language: eng
Type: info:eu-repo/semantics/article
Rights: © 2010 Elsevier B.V.
Peer Review: si
Publisher version:
Appears in Collections:INV - Finanzas de Mercado y Econometría Financiera - Artículos de Revistas

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