This paper examines how forfeiture, vesting, and early exercise affect the value of employee stock options. The forfeiture and exogenous exercise of the options are modeled as two Poisson processes with constant intensity. Rational exercise by the employee due to the option's American feature is...

More than half of S&P 500 CEOs receive options annually, however extant valuation models have not accounted for portfolio considerations. We show the inability of executives to diversify means portfolio effects matter: exercise thresholds and shareholder costs are lower than for stand-alone...

We consider the optimal exercise of a portfolio of American call options in an incomplete market. Options are written on a single underlying asset but may have different characteristics of strikes, maturities and vesting dates.Our motivation is to model the decision faced by an employee who is...

Empirical evidence shows that backdating of executive stock option grants was prevalent, particularly at firms with highly volatile stock prices. Executives who have the opportunity to backdate should take this into account in their valuation. We quantify the value to a risk averse executive of...

We design and derive a pricing model for an executive stock option with a strike price indexed to a benchmark and investigate its valuation and incentive implications. In both up and down markets, the indexed option filters out common risks beyond the executive's control, thereby increasing the...

We examine the value and incentive effects of six nontraditional executive stock options: premium options,performance-vested options, repriceable options, purchased options, reload options, and indexed options. With reasonable parameter values, four options have lower value than a traditional...

I examine the relation between managerial incentives from holdings of company stock and options and stock option repricing. Because options provide incentives to increase both risk and stock price, firms must realize that as options go underwater, executives might face incentives to invest in...

Explicit relative performance awards (RPE) have become an important component of executive compensation. We calculate the value and incentives of explicit RPE awards and find that RPE awards that use a custom peer group are structured both in terms of the peer group and payout design to filter...

This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. Notably, a resource constraint that binds the...