This research provides an alternative framework for the analysis of employee stock option exercise patterns. It develops a binomial model where the exercise decision obeys to a policy that maximizes the expected utility to a representative employee exhibiting preferences as described by the...

This research provides an alternative framework for the valuation of standard employee stock options and for the analysis of exercise behavior patterns. It develops a binomial model where the exercise decision obeys to a policy that maximizes the expected utility to a representative employee...

Probability weighting is one of the cornerstones of decision-making theories accommodating gambling preferences. This paper examines its relevance to explaining employee stock option exercise behavior. We characterized the optimal exercise policy for a representative employee with Rank-Dependent...

We investigate the importance of ambiguity, or Knightian uncertainty, in executives' decisions about when to exercise stock options. We develop an empirical estimate of ambiguity and include it in regression models alongside the more traditional measure of risk, equity volatility. We show that...

This paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a...

Executive compensation packages are often valued in an inconsistent manner: while employee stock options (ESOs) are typically valued ex-ante, cash bonuses are valued ex-post. This renders the existing valuation models of employee compensation packages theoretically unsatisfactory and,...

This paper studies the evolution and incentive effects of the stock-options allotted to the top-managers of the CAC40’s 18 large companies between 1994 and 2003. A database linked to 184 plans of stock-options is used. Three periods of analysis were considered: before, during and after the...

Over the last decade the Danish corporate environment has experienced a significant increase in the use of option-based compensation (OBC). This and many other facts are documented in the present paper which provides the first insights into the characteristics of the option and warrant contracts...

Traditional stock option grant is the most common form of incentive pay in executive compensation. Applying a principal-agent analysis, we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices. Among other benefits, averaging reduces...

This study extends the works of Mauer and Sarkar (2005) and Andrikopoulos (2009) by incorporating a regime-dependent earnings-based bonus into managerial compensation. Examining the individual effects of ownership shares and earnings-based bonus compensation, we find that the former provides...