Employee stock options (ESOs) have become an integral component of compensation in the U.S. In view of their significant cost to firms, the Financial Accounting Standards Board (FASB) has mandated expensing ESOs since 2004. The main difficulty of ESO valuation lies in the uncertain timing of...

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...

Motivated by recent recommendations by both European and American accounting standards boards that executive stock options be expensed in firms' statements, we provide an analytical and flexible framework for their evaluation. Our approach takes into account the vesting period, American style,...

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...

The usage of performance-vesting (p-v) equity awards to top executives in large U.S. companies has grown from 20 to 70 percent from 1998 to 2012. We measure the effects of p-v provisions on value, delta, and vega of equity-based compensation. We find large differences in the value of p-v awards...

We investigate the use of a warrant-pricing approach to incorporate employee stock options (ESOs) into equity valuation and to account for the dilutive effect of ESOs in the valuation of option grants for financial reporting purposes. Our valuation approach accounts for the jointly determined...

One of the arguments often used against expensing employee stock options is that calculating their fair value at the time they are granted is very difficult. This article presents an approach to calculating the value of employee stock options that is practical, easy to implement, and...

The Financial Accounting Standards Board has recently endorsed a proposal that will require firms to calculate and recognize as a cost of compensation the value of employee stock options at the time those options are granted. Conventional models such as the Black and Scholes or binomial models,...

This paper examines whether the risk-taking incentives induced by performance-based vesting (p-v) compensation influence bank loan contracting and credit ratings. Consistent with our risk-shifting hypothesis, we find that the p-v based compensation, as measured by the proportion of grant date...