Managing Employee Stock Option Expense: A Fair Value Approach. Issue 4 (December 2016)

• Record Type: Journal Article
• Authors: Wu, Ming‐Cheng; Lin, I‐Cheng; Huang, Yi‐Ting
• Is Part Of: Australian accounting review. Volume 26:Issue 4(2016:Dec.)
• Page Start: 429
• Page End: 438
• Publication Date: 2016-12
• Subjects: Accounting -- Australia -- Periodicals; Accounting -- Standards -- Australia -- Periodicals; Accounting -- Periodicals; Managerial accounting -- Periodicals; Corporations -- Finance -- Periodicals; 657.0994
• DOI: 10.1111/auar.12111
• Languages: English
• ISSNs: 1035-6908

Abstract

Abstract : Owing to special characteristics, classic option pricing models are not well suited to the valuation of employee stock options (ESOs). This paper attempts to conduct a more general fair value estimation based on attaching performance targets to option vesting. Considering a setting that includes factors such as options that may be exercised early at employee discretion, employee exit rates and firm default risk, this paper presents a sensitivity analysis and empirical tests of option value. The results highlight the importance of considering the characteristics of ESOs in the design of performance‐vested option plans so as to provide the most attractive incentives for employees. Abstract : This paper provides a more general fair value measurement and empirical analyses of performance‐based employee stock options (ESOs). Adopting the suggestions of AASB 2 and IFRS 2, this paper considers the vesting period, early exercise feature, employee exit rates and firm's default risks, which are the characteristics of ESOs.