Executive Stock Options: Value to the Executive and Cost to the Firm

Finance & Accounting

Further details

We develop a continuous time utility-based model for valuing executive stock options (ESCOs). We solve for the optimal exercise policy and the value of ESOs from an executive's perspective. With a simplifying assumption regarding the option's maturity, we derive explicit formulas for the optimal exercise price and the executive's value of a vested ESO. Using the optimal exercise policy that emerges, we derive a simple formula for the sot of ESOs to the firm at the grant date. From an accounting perspective, this cost formula has the advantage of being transparent and straightforward to implement using data on previous ESO exercises.
JEL Clasification: C61, G13, G30, J33, M12
Keywords: Optimal Stopping, Executive Stock Options