Executive Stock Options Pricing with Free Wealth Weights and Continuous Partial Exercise: An Analytic Constrained Portfolio Optimization/Stochastic Discount Factor Approach

ABSTRACTIn the short run, there can be substantial differences in spot freight earnings between geographical regions of the global freight market for bulk carriers. Such differences can be consistent with an efficient market if they are temporary and if they cannot be exploited financially by pursuing chartering strategies that are based on publicly available information. In this paper, we apply a simple optimal switching model to evaluate whether such chartering strategies exist. We model the spot freight rate differential between the Atlantic and Pacific basins as a mean-reverting Ornstein–Uhlenbeck process and the entry–exit decision using the discount factor approach, which results in optimal trigger values for the entry/exit from each basin. Our empirical results suggest that the market is spatially efficient during normal freight market conditions when there is a surplus of vessels. The tight market conditions during the 2003–2008 freight market boom caused a persistent upward bias in Atlantic freight rates, but also here we find little added value from pursuing an active switching strategy.

Entry and exit decisions based on a discount factor approach

Non-Transferable Non-Hedgeable Executive Stock Options Pricing

Non-transferable non-hedgeable executive stock option pricing

This paper develops an executive Asian stock option pricing model based on the volatility estimated by SV-GED model, considering both the features of the volatility of stock return and the abnormal fluctuation of stock price at the expiration date, estimates the parameters of SV-GED model using Markov chain Monte Carlo method, based on Chinese financial index, and compares the value and incentives of executive stock option calculated by the Asian option pricing model based on the volatility estimated by SV-GED model and Black-Scholes stock option model. It shows that SV-GED model has greater veracity in describing the volatility of stock returns; and the value and incentives of the executive stock option evaluated by Asian option pricing model under SV-GED model are larger than those calculated by Black-Scholes stock option model, and the divergence between the two values estimated by two models positively relates to the depth in the money of the option.

We study optimal exercise of executive stock option (ESO) packages when the packages have heterogeneous characteristics and can be continuously exercised over time. We numerically solve the singular control problem and show novel patterns exhibited by the optimal exercise boundaries. Compared with existing models, our model generates richer option exercise patterns and indicates that the optimal option exercising speeds are both time-varying and package-dependent. Assuming the executive exercises each package as a whole, as is often assumed in prior studies, can lead to considerable misestimation of the ESOs’ fair values. We also examine the impact of job termination risk, vesting constraint, and stochastic return volatility on the optimal exercise strategy.

Purpose – The purpose of this paper is to discuss how executive stock options help in reducing agency costs in the firm and to address problems experienced by the firm when stock options are used as incentives. Design/methodology/approach – The paper initially discusses types of agency problems caused by company managers and then explains why stock options can reduce the problem of excessive risk aversion displayed by some managers. It then addresses the problems that may occur with the introduction of executive stock options by the firm and finally offers methods to reduce these problems. Findings – The paper explains the methods available to reduce the problems caused by executive stock options such as indexing the stock options to the S&P 500 index and structuring the Board of Directors in a manner that helps ensure the stock options are used appropriately. Originality/value – This paper is valuable to firms using executive stock options as incentives to managers. It outlines the problems stock options can help solve and the problems which may occur by their use. In addition, the ways to reduce the problems produced by executive stock options in the firm are discussed.

The present study examines the information conveyed to investors through the holding of stock options by executives. In other words, we try to answer the following question: When corporate executives hold stock options that are, on average, either in the money or out of the money, do these holdings convey information to the market? We also examine the differences between the firms' characteristics in both types of situations. When a firm's executive stock options (ESOs) are on average in the money, the results indicate that the market attaches a positive value to the spread size and the number of options outstanding. Furthermore, the importance investor's grant to executives' holding out of the money stock options is far less pronounced. In fact, when a firm's ESOs are on average out of the money, the results tend to show that investors attach value only to the number of options in circulation. Thus, overall, out of the money ESOs do not seem to convey the same information to financial markets as in the money ESOs. Moreover, firms with in the money ESOs are much larger in scale, profitable, and spend less on research and development than firms with out of the money ESOs.

As a part of the compensation package many companies provide executives with executive stock options, which are call options with additional restrictions. They provide some financial advantages to the executives and help the company retain the service of the executives who improve the company’s earnings and management. Until recently the values of the executive stock options were not required to be disclosed in the company�s financial reports. But recent statements from the Financial Accounting Standards Board (FASB) have made it necessary to value these executive stock options. The valuation of executive stock options is also required for investors and financial practitioners. This paper considers the award of performance-based executive stock options when the stock price at the time of stock option award exceeds a given preassigned value. It is assumed that the stock price follows a geometric Brownian motion, and that the number of stock options awarded at any time depends on the stock price at that time. A valuation formula is derived using the method of Esscher transforms for a multiyear award plan. The closed-form formula derived is similar to the Black-Scholes formula for options and utilizes the standard bivariate normal distribution function, which is available in statistical software. In this paper the number of stock options awarded is assumed to be in a specific form, but the theory presented can be modified to suit other forms of award structure. Moreover, by suitable choice of parameters, a valuation formula is also presented for the award of fixed-value executive stock options grants; this formula is also in a closed form and involves cumulative distribution values of the standard normal random variable. Numerical illustrations of the use of the valuation formulas are presented.

We extend research on executive stock options in two ways. First, we generalize Johnson and Tian's (Journal of Financial Economics, 57 (2000b)) single indexed executive stock option to incorporate multiple common risks. Second, we use an expected utility framework to analyze the efficiency and incentive effects of traditional and indexed option grants for risk-averse executives. If firms grant equal numbers of each option type and adjust their moneyness to provide equal utility to executives, single and multi-indexed option grants are less expensive than traditional options while providing stronger incentives to increase stock price. If firms adjust the number of options granted instead of their moneyness to produce equal utility, indexed option grants are more expensive than traditional grants. For firms facing multiple common risks, multi-indexed options are less expensive and provide stronger incentives to increase stock price than single indexed options.

Leverage, Volatility and Executive Stock Options

Leverage, volatility and executive stock options

Purpose – This aim of this paper is to check whether the incentive role of executive stock options (ESO) depends on their level.Design/methodology/approach – The study is based on data from a sample of 538 American firms over 11 years (1994 to 2004). Using regression analysis, the degree of association between earnings management and the percentage stock options in total compensation for different levels of the stock options granted is determined.Findings – The study finds that ESO decreases the earning management and represents an additional control mechanism. When considering the level of ESO, a long‐term alignment of interests is found at low levels. However, at high levels, ESO becomes an additional source of agency conflict in the short and long runs.Research limitations/implications – The results confirm the coexistence of both the contractual and the managerial power hypotheses.Practical implications – This study suggests that the executive compensation strategy and particularly its stock option co...

PurposeThe purpose of this study is to examine the nonlinear relationship between executive stock options and strategic risk taking and to investigate the moderating effect of CEO characteristics (CEO age and tenure). This study aims to analyze whether the impact of executive stock options on strategic risk-taking is moderated by CEO compensation and characteristics.Design/methodology/approachThis study is based on a sample of 90 French firms for the period extending from 2008 to 2021. To deal with the nonlinear relationship, the author adopts a dynamic threshold model.FindingsThe results reveal that the impact of CEO stock options on firm strategic risk-taking is nonlinear and moderated by CEO age and tenure. Using research and development (R&D) as a measure of risk taking, the author show a positive relationship between executive stock option and R&D below the threshold value of stock option, CEO age and tenure and it becomes negative above.Research limitations/implicationsStock options, CEO age and tenure shows that CEO characteristics and compensation structure are major determinants in defining the direction of the nonlinear relationship between CEO stock options and firm strategic risk-taking.Originality/valueThe author extends through this paper the existing research on executive stock option, strategic risk-taking and CEO characteristics using a nonlinear dynamic estimator that caters to the problems of endogeneity. Insights from the findings provide boards and regulators with a better understanding of structuring CEO compensation.

Prior literature provide strong evidence that managers implement opportunistic behavior to depress the exercise price of executive stock options (ESOs) in U.S. listed companies. This paper aims to investigate whether such opportunistic behavior also exists in China. Since Chinese equity incentive regulation uses the stock price before ESO’ report date as the pricing benchmark for the exercise price, we detect managerial opportunism by observing the stock returns surrounding the dates of ESO incentive plan report. Using the data of Chinese listed companies that reported ESO incentive plan from 2009 to 2015, this paper find that the cumulative abnormal returns is significantly negative before the ESO plan reported and significantly positive afterward, indicating that stock price decrease prior to the report dates of ESO plan and increase afterward. The V-shaped pattern of stock price movement around ESO report dates indicates that there are obvious opportunistic behaviors in the exercise price determination process of executive stock options. Regulators should make a longer time window as the pricing benchmark for ESO’ exercise price so as to prevent top managers from manipulating exercise price of their options.