The Time Value of Executive Stock Option Compensation, Intellectual Capital, and Firm-Specific Risk

Abstract

This paper estimates stock prices by extending the Ohlson model, which incorporates both intellectual capital and firm-specific risk factors, and reevaluates the value of stock options. We further examine the relationship between the time value of stock options and the future operating performance of the granting firms to understand the incentive effects of stock options. The findings indicate that the value of executive stock options, which are estimated by the Black-Scholes model, is positively related to both firm-specific risk and intellectual capital. The time value of stock options that is estimated from market stock prices has both concurrent and deferred negative effect on the future operating performance of a company. However, when stock options are valued by method combines firm-specific risk and intellectual capital, the time value of the stock options also has both concurrent and deferred positive effects on operating performance for the next two years.