This paper examines the reliability of option fair value estimates in the presence of transaction costs. The Black Scholes Merton (BSM) framework assumes zero transaction costs and thus might not provide a reasonable approximation in this context. We investigate the model adjustments companies...

We derive a simple formula for the cost of the ESO to the firm at the grant date under the assumption that the executive has a constant market-to-strike multiple. The market-to-strike multiple is defined as the ratio of the market price on exercise to the strike price of the ESO. The expected...

It is well documented in the empirical literature that employee stock options exercise behavior is driven by economic/rational factors as well as by psychological/behavioral factors. The latter include a set of behavioral biases affecting attitudes towards risk. Perhaps the most comprehensive...

Using data that includes specific contractual details of Relative Performance Evaluation (RPE) contracts granted to executives for 1,833 firms for the period 1998 to 2012, we develop new methods to characterize RPE awards and measure their value and incentive properties. The frequency in the use...

We examine the determinants of managers' use of discretion over employee stock option (ESO) valuation-model inputs that determine ESO fair values. We also explore the consequences of such discretion. Firms exercise considerable discretion over all model inputs and this discretion results in...

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 examine the determinants of managers' use of discretion over employee stock option (ESO) valuation-model inputs that determine ESO fair values. We also explore the consequences of such discretion. Firms exercise considerable discretion over all model inputs and this discretion results in...

Prior research generally finds that firms underreport option expense by managing assumptions underlying option valuation (e.g. they shorten the expected option lives), but it fails to document management of a key assumption, the one concerning expected stock-price volatility. Using a new...

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...

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...