Valuation of executive stock options and the FASB proposal
Article Abstract:
The Financial Accounting Standards Board (FASB) has recently considered a plan to measure compensation related to grants of executive stock options (ESOs) at their fair values with a lower bound constraint.This is because of the inadequacy of the generally accepted accounting method, where no compensation expense is recorded for ESOs if the exercise price on the grant date is equal to or higher than the stock's market price, while minimal compensation expense is recorded if the exercise price on the grant date is less than the stock's market price. The FASB plan also requires that stock option compensation be measured not on the date of grant but on the vesting date. This plan is applied to a random sample of firms to see its effect on operating income and to compare its models. The results show that material income effects are seen if the FASB's plan is adopted.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1991
User Contributions:
Comment about this article or add new information about this topic:
A comment on 'Valuation of Executive Stock Options and the FASB Proposal.' (Financial Accounting Standards Board)(comment on article by T.W. Foster, III, P.R. Koogler and D. Vickrey, The Accounting Review, vol. 66, p. 595, 1991)(includes appendix) (Shorter Articles)
Article Abstract:
The valuation of executive stock options (ESO) is modeled in the context of their stochastic lives. The Black-Scholes (B-S) model for call option pricing proposed by Foster et al. (1991) ignores the possibility that an ESO may be cancelled before its expiry if the owner-executive leaves the issuing company. Thus, the B-S model overstates ESO values because this possibility reduces their value in relation to ordinary call options. However, this stochastic life feature may be modeled by quantifying the likelihood that an executive will leave his position. Multiplying by this probability extends the B-S model to one that can accurately value ESO's despite their stochastic limits. However, the proposed valuation technique is appropriate only from a company and not the executive's perspective.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1993
User Contributions:
Comment about this article or add new information about this topic:
Valuation of executive stock options and the FASB proposal: an extension
Article Abstract:
Jennergren and Naslund's (1993) extension of the Black-Scholes (B-S) call option pricing model for the valuation of executive stock options (ESO) is problematic and yields results that are not significantly different from the original study. They proposed the incorporation of the probability of premature ESO cancellation in case the owner-executive leaves the firm, a possibility which reduces ESO values. The parameter they proposed, however, suffers from instability, uniqueness and estimation difficulties. Nevertheless, application of their methodology to the Financial Accounting Standards Board proposal in the original study is attempted. The results are similar to the previous ESO values obtained using the unrevised B-S model.
Publication Name: Accounting Review
Subject: Business, general
ISSN: 0001-4826
Year: 1993
User Contributions:
Comment about this article or add new information about this topic:
- Abstracts: Do cost accounting standards fill a gap in cost allocation? MAP Committee issues SMA 4F, "Allocation of Information Systems Costs." (statement of management accounting issued by the Management Accounting Practices Committee of the National Association of Accountants)
- Abstracts: New software tackles the problem of getting onto Web. Windows 95 passes the test of time for home PC users. Computer viruses are nothing to sneeze at, but they're curable
- Abstracts: Waco, Texas standoff at cult compound drags on. Scores die as besieged Texas cult compound burns down; FBI calls blaze a mass suicide by Branch Davidians
- Abstracts: As IBM's woes grew, its accounting tactics got less conservative; firm aggressively recorded shipments as sales, used rare leasing 'insurance;' company defends its moves
- Abstracts: Prepaid monetary incentive effects on mail survey response. A note on the applicability of the Bruvold-Comer model of mail survey response rates to commercial populations