Abstract
Employee (or executive) stock options (ESOs) have generated considerable debate (and not an insignificant volume of research) amongst accountants and finance professionals in recent years. This debate has been fuelled by the growing use of stock options as a component of remuneration and by the institution of international accounting practices that require the expensing of these options in the income statement. The debate has been further compounded by an increasing involvement from financial mathematicians with regard to their pricing. Thus far, no group has managed to reach any consensus regarding the valuation of these stock options, or how they should be reflected in the accounting records. In this paper we integrate the accounting and pricing discussions and provide a model which links the valuation of the stock options with their accounting treatment.
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