Working Paper: NBER ID: w7020
Authors: Steven Huddart; Ravi Jagannathan; Jane Saly
Abstract: Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of any reload feature because, at the time of writing the standard in 1995, the Financial Accounting Standards Board believed it was not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to determine the grant date value of such options. Ignoring the reload feature can substantially understate the value of the option: the reload feature increases the value of an otherwise similar option by 24 percent in the example we consider. In view of the potential significance of the reload feature and the versatility of the Binomial Option Pricing Model, the Financial Accounting Standards Board may wish to reconsider the accounting for options with a reload feature.
Keywords: No keywords provided
JEL Codes: C80; D84; J33; M12; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reload feature (Y60) | increased value of the option (D46) |
| reload feature (Y60) | optimal exercise strategy of the options (C61) |
| ignoring the reload feature (Y70) | understated value of the option (D46) |