scholarly journals Executive stock options with a rebate: Valuation formula

2006 ◽  
Vol 3 (4) ◽  
pp. 76-79
Author(s):  
P.W.A. Dayananda
Keyword(s):  
Discrete Time ◽  
Continuous Time ◽  
Stock Price ◽  
Stock Options ◽  
Stock Option ◽  
Executive Stock Options ◽  
Exercise Time ◽  
Executive Stock Option ◽  
Exercise Period ◽  
Over Time

We examine the valuation of executive stock option award where there is a rebate at exercise. The rebate depends on the performance of the stock of the corporation over time the period concerned; in particular we consider the situation where the executive can purchase the stock at exercise time at discount proportional to the minimum value of the stock price over the exercise period. Valuation formulae are provided both when assessment is done in discrete time as well as in continuous time. Some numerical illustrations are also presented

scholarly journals Risk metrics: assessing executive stock options plans

2008 ◽  
Vol 5 (2) ◽  
pp. 409-413
Author(s):  
P.W.A. Dayananda
Keyword(s):  
Empirical Research ◽  
Stock Options ◽  
Research Work ◽  
Stock Option ◽  
Executive Stock Options ◽  
Executive Stock Option

This paper considers deriving measures for assessing the benefits to firms as a result of granting executive stock option plans. The metrics developed relate to assessing the expected total earnings of the company attributed to executives due to executive stock option award. The paper derives metrics based on number of shares as well as on total value of assets. The values of these metrics can be used to compare and asses the benefits to the company in awarding stock option grants by comparing the metrics with actual realized changes in total earnings. The research work in the paper complements the empirical research of Murphy (1999) and others who found the pay-performance sensitivities due to executive stock option awards. Illustrations of the metrics are carried out to show their properties and in particular for the firm WAL-MART.

Executive Stock Options, Missed Earnings Targets, and Earnings Management

2008 ◽  
Vol 83 (1) ◽  
pp. 185-216 ◽  
Author(s):  
Mary Lea McAnally ◽  
Anup Srivastava ◽  
Connie D. Weaver
Keyword(s):  
Earnings Management ◽  
Stock Price ◽  
Stock Options ◽  
Empirical Studies ◽  
Stock Option ◽  
Annual Data ◽  
Executive Stock Options ◽  
Anecdotal Evidence ◽  
Strike Price ◽  
Earnings Targets

This paper examines whether stock-option grants explain missed earnings targets, including reported losses, earnings declines, and missed analysts' forecasts. Anecdotal evidence and surveys suggest that managers believe that missing an earnings target can cause stock-price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants. Prior option grant studies explore only general downward earnings management (Balsam et al. 2003; Baker et al. 2003), but our study is the first to explore whether option grants encourage missed earnings targets. Indeed, if missed targets drive the prior results, then the literature has failed to document an important negative outcome of stock-option incentives. We use quarterly and annual data for fixed-date options granted after firms announce they have missed earnings targets. We find that firms that miss earnings targets have larger and more valuable subsequent grants. Further, we find that the likelihood of missing earnings targets for firms that manage earnings downward increases with stock-option grants. To control for the possibility that firms miss earnings targets for operational reasons, we only include firms that likely managed earnings downward (Dechow et al. 1995; Phillips et al. 2003). Backdating or opportunistic timing of grants cannot explain our results because we include only fixed-date grants. While many studies explicitly consider whether and why managers meet or beat earnings targets, ours is the first study to find that some managers may seek to miss earnings targets (Burgstahler and Dichev 1997).

Option repricing and executive retention – revisited

2016 ◽  
Vol 15 (4) ◽  
pp. 499-517
Author(s):  
Sandra Renfro Callaghan ◽  
Chandra Subramaniam ◽  
Stuart Youngblood
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Control Sample ◽  
Stock Option ◽  
Executive Turnover ◽  
Content Type ◽  
Executive Stock Option ◽  
Managerial Talent ◽  
Option Repricing ◽  
Stock Option Repricing

Purpose This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention. Design/methodology/approach The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event. Findings It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years. Research limitations/implications Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good. Originality/value Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.

scholarly journals EXECUTIVE STOCK OPTION PLANS: UJI PENGELOLAAN LABA SELAMA VESTING PERIOD

2018 ◽  
Vol 14 (4) ◽  
pp. 478-500
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Stock Options ◽  
Stock Exchange ◽  
Early Stage ◽  
Financial Statements ◽  
Stock Option ◽  
Share Price ◽  
Executive Stock Option ◽  
Grant Program ◽  
Final Sample ◽  
A Company

This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final

Cendant Corp.: A Case Study Examining the Compensation and Accounting Issues Involved in a Stock-Option Repricing Program

2001 ◽  
Vol 16 (3) ◽  
pp. 409-441 ◽  
Author(s):  
Thomas J. Vogel
Keyword(s):  
Stock Price ◽  
Stock Options ◽  
Poor Performance ◽  
Stock Option ◽  
Compensation Committee ◽  
Corporate Executives ◽  
Price Increases ◽  
Exercise Price ◽  
Option Repricing ◽  
Stock Option Repricing

Stock options are usually issued to corporate executives in an attempt to align the interests of those individuals with the interests of the company's shareholders. The options are designed to provide a large payoff to the executives when the company's stock price increases substantially above the exercise price of the options. However, in those periods when a company performs poorly, its stock price may decrease to a level below the exercise price of outstanding options. When this occurs, the options are said to be “underwater.” Because options provide a benefit only as the stock price increases, underwater options will often lack the motivational incentive that they were designed to create. This creates a dilemma to the compensation committee of the company—i.e., modify the compensation agreements of the individuals in charge during the period of poor stock price performance or risk losing those executives to other companies. One such modification that is often considered in these circumstances is a stock-option repricing program. Here, underwater stock options are exchanged for new options containing a lower exercise price. These programs experienced increased popularity during the 1990s despite the opposition that arose from critics who claimed that repricing programs “rewarda” executives for poor performance. This instructional case requires students to evaluate the appropriateness of a stock-option repricing program for the executives and other employees of Cendant Corp. This company experienced a severe decrease in its stock price during 1998 as a result of many factors including an accounting scandal, failed expansion efforts, and poor market conditions. In addition, the case material can also be used to introduce students to the accounting implications of stock-option repricing programs as modified by Interpretation No. 44, issued by the Financial Accounting Standards Board in March 2000.

scholarly journals EXECUTIVE STOCK OPTION PLANS: UJI PENGELOLAAN LABA SELAMA VESTING PERIOD

2017 ◽  
Vol 14 (4) ◽  
pp. 478
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Stock Options ◽  
Stock Exchange ◽  
Early Stage ◽  
Financial Statements ◽  
Stock Option ◽  
Share Price ◽  
Executive Stock Option ◽  
Grant Program ◽  
Final Sample ◽  
A Company

This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final.

scholarly journals Diluted Earnings Per Share Overstatement Bias: Including Unrecognized Employee Compensation In Proceeds From Assumed Exercise Of Employee Stock Options Under The Treasury Stock Method

2013 ◽  
Vol 29 (6) ◽  
pp. 1657
Author(s):  
David T. Doran
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Stock Options ◽  
Fair Value ◽  
Stock Option ◽  
Employee Stock Options ◽  
Employee Compensation ◽  
Earnings Per Share ◽  
Service Period ◽  
Free Environment

Generally accepted accounting principles (GAAP) require firms to recognize compensation expense under the fair value method in the case of employee stock options. Straight line amortization of the options grant date fair value must be recognized as expense over the service period which decreases the earnings per share numerator. For diluted earnings per share (EPS), GAAP requires using the treasury stock method, where proceeds from assumed stock option exercise is used to purchase treasury shares at the average for the period price. Exercise proceeds include the exercise price plus unrecognized future employee compensation. For profitable firms, exercise is assumed if dilutive - more shares are assumed issued than are reacquired for the treasury which increases the diluted EPS denominator. These requirements are consistent across US GAAP and International Financial Reporting Standards. This paper tests whether including unrecognized employee compensation in proceeds from the assumed exercise of employee stock options under the treasury stock method is appropriate. A simple multi period model that assumes a risk free environment with complete certainty is applied. This study contributes to the literature by demonstrating that future unrecognized employee compensation should not be included in proceeds from the assumed exercise of stock options under the treasury stock method. Doing so consistently causes diluted EPS overstatement, and in certain instances causes assumed exercise of in the money options to be antidilutive, which results in complete exclusion from the diluted EPS calculation. This research extends the employee stock option work of Doran (2005 and 2008) that found: 1) Compensation expense recognized over the employee service period should equal the periodic annuity amount that provides the options grant date fair value, and 2) Treasury shares should be assumed purchased at the higher end of period stock price.

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