Employees’ Attitudes Toward Equity-Based Compensation

2012 ◽  
Vol 44 (5) ◽  
pp. 246-253 ◽  
Author(s):  
Menachem (Meni) Abudy ◽  
Efrat Shust
Keyword(s):  
Stock Options ◽  
Field Survey ◽  
Financial Education ◽  
Employee Stock Options ◽  
The Past ◽  
Black Scholes Model ◽  
Subjective Value ◽  
Black Scholes ◽  
Objective Value ◽  
The Relationship

This article presents a field study that examines the subjective value of equity-based compensation and investigates the relationship between attitude toward risk and compensation preferences. The participants in the field survey received equity-based compensation in the past but lack financial education background. We find that the respondents exhibit difficulty in estimating the value of employee stock options, which usually results in a subjective value that is lower than the objective value (calculated using the Black–Scholes model). Additional findings demonstrate the presence of behavioral biases such as priming and mental anchoring. Finally, we document an absence of transitivity in the preferences of 10% of the respondents.

scholarly journals The Black-Scholes Model Guideline For Options Course As Taught At Notre Dame University - Lebanon

2011 ◽  
Vol 4 (1) ◽  
Author(s):  
Viviane Y. Naimy
Keyword(s):  
Option Price ◽  
Stochastic Calculus ◽  
Black Scholes Model ◽  
Black Scholes ◽  
Calculus I ◽  
Relationship Of ◽  
The Relationship

This paper presents the methodology used for Notre Dame University’s finance students to explain and explore the Black-Scholes model without going through the complexity of mathematics to model random movements or through stochastic calculus. I will name and develop the steps that I follow in order to allow students to properly use the Black-Scholes model and to understand the relationship of the model’s inputs to the option price while monitoring the risk via delta and gamma hedging.

scholarly journals THE RELATIONSHIP BETWEEN STOCK RETURN SKEWNESS AND BANK FEATURES

2018 ◽  
Vol 06 (02) ◽  
pp. 1850010
Author(s):  
SILVIA BRESSAN ◽  
ALEX WEISSENSTEINER
Keyword(s):  
Stock Returns ◽  
Empirical Evidence ◽  
Stock Options ◽  
Stock Return ◽  
Expected Returns ◽  
The Past ◽  
Small Banks ◽  
The Relationship ◽  
Forward Looking

This paper studies to what extent bank-specific characteristics relate to stock return skewness. The main finding is that stock return skewness decreases significantly in bank size, measured in terms of total assets, i.e stocks of large banks are less skewed than those of small banks. This result holds for backward-looking skewness computed using the past stock returns, as well as for forward-looking skewness extracted from stock options. We interpret the empirical evidence by arguing that bank size increases the likelihood to have severe losses, to the point that investors expect to be compensated by receiving higher expected returns.

The Impact of IFRS 2 "Share-Based Payment" on Malaysian Companies

2010 ◽  
Vol 13 (03) ◽  
pp. 449-468 ◽  
Author(s):  
Ruhaya Atan ◽  
Nur Syuhada Jasni ◽  
Yousef Shahwan
Keyword(s):  
Stock Options ◽  
Negative Relationship ◽  
Fair Value ◽  
Employee Stock Options ◽  
Accounting Standard ◽  
Corporate Scandals ◽  
Black Scholes ◽  
Compensation Plan ◽  
The Impact ◽  
International Accounting Standard

In the wake of corporate scandals and excessive stock options compensation, International Accounting Standard Board (IASB) has introduced a new accounting standard, IIFRS 2 Share-based Payments. The scope of the standard extends beyond payments to employees, but for the purpose of this study, the focus is only on 'employee stock options'. IIFRS 2 requires a fair value of stock options records calculated on grant date, and recognized as compensation expenses over vesting periods. Prior to the introduction of IIFRS 2, stock options were not recognized and were only disclosed in the notes to the accounts. In Malaysia, the standard is mandatory for all companies listed on or after January 1, 2006. This study assumes the requirement existed in 2003. This study examines the impact of stock options expenses from 2003 to 2005, on the top 100 Malaysian companies. The three year observations show at least 24% of the sample exceeds the 5% materiality threshold on diluted EPS. The sectors that are impacted the most are the Trade/Service and Finance sectors. From the multiple-regression test, this study finds that fair value of stock options have a negative relationship with dividend yields (input of the Black-Scholes Merton (BSM) Model). Most companies in the sample are found to pay dividends and grant stock options at the same time. Therefore, this study suggests that companies need to restructure their compensation plan thus balancing the stock options granted and dividends paid in the future.

scholarly journals No More Scandals: A Simple Model For Valuing Employee Stock Options

2011 ◽  
Vol 5 (3) ◽  
Author(s):  
J. Howard Finch ◽  
Joseph C. Rue ◽  
Ara G. Volkan
Keyword(s):  
Simple Model ◽  
Stock Options ◽  
Low Cost ◽  
Financial Statement ◽  
Employee Stock Options ◽  
Senior Managers ◽  
Primary Methods ◽  
Black Scholes ◽  
Compensation Packages ◽  
Flow Effects

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The escalating size of compensation packages to senior managers and investor disillusionment have resulted in growing calls for the expensing of employee stock options (ESO).<span style="mso-spacerun: yes;">&nbsp; </span>While initially slow to respond, the FASB has now mandated the expensing of ESO.<span style="mso-spacerun: yes;">&nbsp; </span>The two primary methods used to value ESO, the Black-Scholes closed form equation and the lattice model, suffer from several deficiencies<span style="mso-spacerun: yes;">&nbsp; </span>.A Simple model for valuing ESO that marks the option expense to market in succeeding financial statement dates and allows for the staggered exercise dates of option holders is available. The model is easy to understand, would have a low cost of implementation, and offers a superior estimate of the true cash flow effects associated with the opportunity cost to shareholders of ESO exercise.</span></span></p>

scholarly journals VALUATION OF EMPLOYEE RELOAD OPTIONS USING UTILITY MAXIMIZATION APPROACH

2005 ◽  
Vol 08 (05) ◽  
pp. 659-674 ◽  
Author(s):  
KA WO LAU ◽  
YUE KUEN KWOK
Keyword(s):  
Risk Aversion ◽  
Stock Options ◽  
Utility Maximization ◽  
Stock Option ◽  
Employee Stock Options ◽  
Employee Stock Option ◽  
General Utility ◽  
Black Scholes ◽  
The Difference ◽  
The Cost

The reload provision in an employee stock option is an option enhancement that allows the employee to pay the strike upon exercising the stock option using his owned stocks and to receive new "reload" stock options. The usual Black–Scholes risk neutral valuation approach may not be appropriate to be adopted as the pricing vehicle for employee stock options, due to the non-transferability of the ownership of the options and the restriction on short selling of the firm's stocks as hedging strategy. In this paper, we present a general utility maximization framework to price non-tradeable employee stock options with reload provision. The risk aversion of the employee enters into the pricing model through the choice of the utility function. We examine how the value of the reload option to the employee is affected by the number of reloads outstanding, the risk aversion level and personal wealth. In particular, we explore how the reload provision may lower the difference between the cost of granting the option and the private option value and improve the compensation incentive of the option award.

scholarly journals The Impact of Liquidity on GARCH Option Pricing Error during Financial Crisis

2017 ◽  
Vol 4 (4) ◽  
pp. 160
Author(s):  
Han Ching Huang ◽  
Yong Chern Su ◽  
Wei-Shen Chen
Keyword(s):  
Financial Crisis ◽  
Option Pricing ◽  
Garch Model ◽  
Black Scholes Model ◽  
Pricing Errors ◽  
Black Scholes ◽  
Out Of Sample ◽  
Pricing Error ◽  
The Impact ◽  
The Relationship

In this paper, we explore the valuation performance of Heston and Nandi GARCH (HN GARCH) model on the pricing of options of financial stocks listed for AMEX during pre and post financial crisis periods. We find that the GARCH pricing model presents better performance than the traditional Black-Scholes model for the out-of-sample option pricing, no matter what the moneyness and the time-to-maturity. Specifically, the models show the effects of liquidity is not significant. Intuitionally, smaller liquidity tends to exhibit more pricing errors, especially for longer mature options. Unfortunately, we cannot get the expected outcomes, which is that the period of post financial crisis tend to have larger pricing errors. In sum, except more computational convenience, the HN GARCH model offers another vision of the relationship between liquidity and its effect on pricing errors.

scholarly journals Do Profitable And Non-Profitable Firms Pay Executives Differently?

2011 ◽  
Vol 4 (6) ◽  
Author(s):  
Martin Gritsch ◽  
Tricia Coxwell Snyder
Keyword(s):  
Executive Compensation ◽  
Stock Options ◽  
Considerable Increase ◽  
The Past ◽  
Job Productivity ◽  
Performance Based Pay ◽  
The Relationship ◽  
The Way

In the past decade, there has been a considerable increase in the use of stock options as a form of executive compensation. While agency theorists study the relationship between performance based pay and job productivity, they have not addressed whether executive compensation is impacted by a firm’s profitability. Profitable firms may pay executives more incentive-based pay, to reward their managers for a good job. In contrast, non-profitable firms may be willing to pay executives more in the way stock options to attract better managers. We find that a CEO’s probability of receiving stock options increases if he/she is employed by a profitable firm. However, the amount received by such a CEO is substantially less than the amount received by the average CEO at a non-profitable company.

scholarly journals Employee Stock Options Or Tax Nightmares

2011 ◽  
Vol 1 (1) ◽  
Author(s):  
Raj Kiani ◽  
Dwight Call ◽  
M. Sangeladji
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Effective Means ◽  
Stock Option ◽  
High Tech ◽  
Employee Stock Options ◽  
Highly Qualified ◽  
The Past ◽  
Cash Compensation ◽  
Set Up

In the past several years, many companies, especially in the high-tech, have used incentive stock options as effective means of attracting and maintaining highly qualified employees. With properly designed employees stock options, companies have been able to compensate highly paid executives with a little or no cash out flow. Accepting stock options in lieu of cash compensation has allowed employees to postpone tax on their compensations and to convert the ordinary income to the capital gain income through a later exercise and the sales of their stock options. These benefits can be achieved, if companies set up the stock options properly and employees apply them correctly. Otherwise, employees may get stuck in incentive stock option tax traps depending on the type of stock options. One tax trap related to the Incentive Stock Option (ISO) is a danger of an Alternative Minimum Tax (AMT). The tax trap related to Nonqualified Stock Option (NQSO) is the possibility of a phantom profit. This profit, even though the stock may not have been sold yet by the employees, must be reported by employer to the Internal Revenue Service through employees W-2 form in the year the options are granted or exercised, depending on the prevailing situation. Employees, who exercise this type of options and keep the purchased stocks, may risk watching the stock price decline but still having to pay taxes based on their paper profit.

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